Modelling monetary policy in South Africa: Focus on inflation targeting era using a simple learning rule

Ruthira Naraidoo and Rangan Gupta

No 200904, Working Papers from University of Pretoria, Department of Economics

Abstract: A simple empirical nonlinear framework is used to analyse monetary policy between 1983 and 2007 in South Africa, focusing on the policy of in?ation targeting introduced in Feb 2000, more precisely when the South African Reserve Bank (SARB) announced that an inflation zone targeting regime of 3-6% would be in place. We find that a model specification embodying a simple inflation learning rule for the future inflation rate seems to provide a better understanding of the decision process made by the SARB in its interest rate setting policy. The main findings are that the adoption of inflation targeting led to significant changes in monetary policy, secondly, post-2000 monetary policy is asymmetric as policy-makers respond more to downward deviation of inflation away from the target, thirdly, post-2000 policy-makers may be attempting to keep inflation within the 4.5%-6.9% range rather than pursuing a target zone of 3-6% as generally pre- announced and fourthly, the response of monetary policy to in?ation is nonlinear as interest rates respond more when inflation is further from the target.

Keywords: Monetary policy; inflation targeting; inflation learning rule; nonlinear smooth transition model (search for similar items in EconPapers)
JEL-codes: C51 E52 E58 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2009-01
New Economics Papers: this item is included in nep-afr, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (22)

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