EconPapers    
Economics at your fingertips  
 

Monetary policy and inflation in South Africa: A VECM augmented with foreign variables

Annari De Waal and Renee van Eyden ()

No 201231, Working Papers from University of Pretoria, Department of Economics

Abstract: We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, suitable for a small open economy like South Africa. This type of model is known as an augmented vector error correction model (VECM), referred to by VECX*. We compile the foreign variables with trade-weighted three-year moving average data for 32 countries, to account for the significant change in trade shares over time. This model is novel for South Africa, in two ways: it is the first VECX* developed to analyse monetary policy in the country and the first model that uses time-varying trade weights for the creation of the foreign series. We find three significant long-run economic relations: the augmented purchasing power parity, the uncovered interest parity and the Fisher parity. These long-run relations are imposed on the VECX* to investigate the effect of a monetary policy shock on inflation. The results suggest the effective functioning of the monetary transmission mechanism in South Africa.

Keywords: South Africa; monetary policy; structural cointegrated vector autoregressive model; augmented VECM; VECX* (search for similar items in EconPapers)
JEL-codes: C50 E52 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2012-10
New Economics Papers: this item is included in nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.up.ac.za/media/shared/61/WP/wp316.zp39490.pdf (application/pdf)

Related works:
Journal Article: Monetary policy and inflation in South Africa: A VECM augmented with foreign variables (2014) Downloads
Working Paper: Monetary policy and inflation in South Africa: A VECM augmented with foreign variables (2012) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201231

Access Statistics for this paper

More papers in Working Papers from University of Pretoria, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Rangan Gupta ().

 
Page updated 2024-02-28
Handle: RePEc:pre:wpaper:201231