Monetary Policy and Heterogeneous Inflation Expectations in South Africa

Alain Kabundi (akabundi@imf.org), Eric Schaling (eric.schaling@wits.ac.za) and Modeste Some

No 6107, Working Papers from South African Reserve Bank

Abstract: This paper examines the relationship between inflation and inflation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate inflation expectations of individual agents as the weighted average of lagged inflation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. Inaddition, expectations of price setters are somewhat related to lagged inflation andthe opposite is true for analysts. The results reveal that the SARB has successfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to accommodate private agents expectations.

Date: 2014-02-19
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: Monetary policy and heterogeneous inflation expectations in South Africa (2015)
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