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Should the SARB Have Stayed Time Inconsistent?

Rangan Gupta () and Josine Uwilingiye

No 200833, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper derives the econometric restrictions imposed by the Barro and Gordon (1983) model of dynamic time inconsistency on a bivariate time-series model of Consumer Price Index (CPI) inflation and real Gross Domestic Product (GDP), and tests these restrictions based on quarterly data for South Africa covering the period of 1960:01 through 1999:04, i.e., for the pre-inflation targeting period. The results show that the data are consistent with the short- and long-run implications of the theory of time-consistent monetary policy. Moreover, when the model is used to forecast one-step-ahead inflation over the period of 2001:01 to 2008:02, i.e., the period covering the starting point of the inflation targeting regime till date we, on average, obtain lower rates of inflation. The result tends to suggest that the South African Reserve Bank (SARB), perhaps needs to manage the inflation targeting framework better than it has done so far.

Keywords: Dynamic Time Inconsistency; Inflation Targeting; One-Step-Ahead Forecasts (search for similar items in EconPapers)
JEL-codes: E31 E52 E61 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2008-10
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
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