An analysis of the effectiveness of inflation targeting monetary policy framework in South Africa

The aim of this study was to investigate the effectiveness of inflation targeting in South Africa using the Vector Autoregressive method (VAR). The study used monthly data for the period 2000 to 2013 on the following variables: Consumer Price Index Inflation (CPI), money supply (M1), Repo Rate and the Nominal Exchange Rate (NER). The VAR methodology was used to investigate the response of inflation to monetary policy shocks under the inflation targeting framework. The findings from the study revealed that the response of inflation is not consistent with the Taylor rule hence increases in the repo rate meant to reduce inflation actually increase the inflationary pressures in the economy. This is due to the composition of the Consumer Price Index. Housing constitutes the largest weight on the CPI hence this has an impact on how the Repo rate affects inflation. Increases in the repo rate results in increase in the demand for rentals because prospective home owners tend to resort to renting because mortgage loans become expensive as a result of high interest rates. The increase in the demand for rentals pushes the rental price of houses. This results in higher inflation levels. Furthermore, the study established that the inflation targeting framework is effective in reducing inflation persistence because inflation approaches steady state with twelve months after exposure to structural shocks in the VAR system. The autoregression model of inflation showed that the sum of the coefficients is less than one (0.965) showing that inflation targeting has effectively reduced the persistence of inflation of South Africa.

Grantor dc:publisher

University of Namibia

Year dc:date.issued

2015

Author dc:creator

• Makuvaza, Leonard

• Inflation
• Monetary framework

Language dc:language.iso

en

Handle dc:identifier.uri

http://hdl.handle.net/11070/1664

OAI identifier oai:identifier

oai:repository.unam.edu.na:11070/1664