Isolating a measure of inflation expectations for the South African financial market using forward interest rates

Monique Reid

No 09/2009, Working Papers from Stellenbosch University, Department of Economics

Abstract: The inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa and offers an additional method, which is market based. The methodologies of Nelson and Siegel (1987) and Svensson (1994) are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market’s inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.

Keywords: South Africa; Inflation expectations; Monetary policy transmission mechanism; Implied forward rates; Term structure of interest rates (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2009
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 (1)

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https://www.ekon.sun.ac.za/wpapers/2009/wp092009/wp-09-2009.pdf First version, 2009 (application/pdf)

Related works:
Journal Article: ISOLATING A MEASURE OF INFLATION EXPECTATIONS FOR THE SOUTH AFRICAN FINANCIAL MARKET USING FORWARD INTEREST RATES (2009)
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