Modeling Monetary Policy In South Africa: Focus On Inflation Targeting Era Using A Simple Learning Rule

Abstract

A simple empirical nonlinear framework is used to analyze monetary policy between 1983 and 2007 in South Africa, focusing on the policy of inflation targeting introduced in Feb 2000, more precisely when the South African Reserve Bank (SARB) announced that an inflation zone targeting regime of 3-6% would be in place. We find that a model specification embodying a simple ‘inflation learning rule’ for the future inflation rate seems to provide a better understanding of the decision process made by the SARB in its interest rate setting policy. The main findings are: 1) that the adoption of inflation targeting led to significant changes in monetary policy, 2) post-2000 monetary policy is asymmetric as policymakers respond more to downward deviation of inflation away from the target, 3) post-2000 policymakers may be attempting to keep inflation within the 4.5%–6.9% range rather than pursuing a target zone of 3-6%, as generally pre-announced, and 4) the response of monetary policy to inflation is nonlinear as interest rates respond more when inflation is further from the target.