Working Paper WP2011 Commodity Prices and Policy Stabilisation in South Africa
Byron Botha and
No 10225, Working Papers from South African Reserve Bank
In order to account for the effects of commodity exports on the South African business cycle we use a multivariate extension of the Hodrick Prescott (HP) filter that incorporates commodity prices. We find that ignoring commodity prices results in a monetary policy stance that is more dovish than the one implied by our multivariate measure of the business cycle. This may partly explain why inflation breached the inflation target from 2007Q2 to 2009Q4, and overshot the upper bound of the target again by mid-2014. In addition we find that incorporating information about commodity prices implies smaller revisions of the estimated output gap. This in turn, enables a more consistent narrative around economic slack and monetary policy over time.
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