SHOULD THE SOUTH AFRICAN RESERVE BANK RESPOND TO EXCHANGE RATE FLUCTUATIONS? EVIDENCE FROM THE COSINE-SQUARED CEPSTRUM

Rangan Gupta

No 201201, Working Papers from University of Pretoria, Department of Economics

Abstract: Empirical evidence on the whether the inflation-targeting South African Reserve Bank (SARB) should also consider responding to exchange rate fluctuations, are contradictory. Against this backdrop of contradictory evidence, we revisit the issue by questioning if the inflation rate is more volatile than it would have been had South Africa not moved to a flexible exchange rate regime in 1995, using the cosine-squared cepstrum. We find that the CPI inflation in South Africa has become more volatile since the second quarter of 1995, post a flexible exchange rate regime, than it would have been had the country continued to pursue a fixed exchange rate policy. Based on this result, we can conclude that the SARB should perhaps respond to exchange rate fluctuations, however, we also warn against the cost of increased volatility in output that is likely to result from targeting exchange rate variability.

Keywords: Cosine-Squared Cepstrum; Exchange Rate Regime; Inflation Targeting; Inflation Volatility; Output Volatility; Saphe Cracking (search for similar items in EconPapers)
JEL-codes: C65 E42 E52 E64 F31 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2012-01
New Economics Papers: this item is included in nep-afr, nep-cba and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201201

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