Monetary policy credibility and exchange rate pass-through in south africa
Inflation and Inflation Expectations. This finding is important because monetary policy authorities do not have to worry to a great degree about exchange rate fluctuations—over which they have made a policy choice not to influence—when deciding on monetary policy actions. Estimating a time-varying financial conditions index for South Africa. Figure 2 depicts the extracted ERPT which shows a considerable decline from 50 percent in to 20 percent in Read more about our banking services. Papers by year: All
Dovern, Fritsche, and Slacalek find that central bank credibility is explained by the level of inflation, inflation volatility, and uncertainty about monetary policy. Effects of reputation and credibility on monetary policy: Theory and evidence for Brazil. Mankiw and Reis propose an alternative explanation by way of a sticky information model in which some people form expectations based on outdated information. The pattern followed by the two series in Figure 7 is somewhat the same as that in Figure 6 , expect for a sharp increase in Even though inflation volatility is trending upward since , the two spikes towards the end are outliers. The use of core instead of headline inflation does not materially change the basic results.
Second, uncertainty in monetary policy renders the predictability of inflation by agents difficult, which in turn impacts negatively anchoring of inflation expectations. IMF eLibrary. He provided evidence showing that inflation is positively correlated with its own persistence, suggesting that the low inflation itself has caused the low pass-through. JEL: E31 , E As a consequence, policymakers should be cognizant that the appropriate policy response should fully incorporate the non-linear nature underlying the dynamic response. This is a preview of subscription content, log in to check access.
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Since macroeconomic variables are released with delay, policymakers do not have all information concerning the state of the economy when they make decisions. Monetary Policy Credibility and Exchange Rate Pass-Through Figure 9 depicts our measure of credibility and the exchange rate pass-through observed from Q2 to Q1. Regression 3 confirms the notion of changing relationship between monetary policy credibility and the ERPT. However, expectations of businesses and trade unions are backward looking. User Account. It is worth mentioning that inflation breaches the target band during these periods. In this section:.
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Second, uncertainty in monetary policy renders the predictability of inflation by agents difficult, which in turn impacts negatively anchoring of inflation expectations. De Mendonca, H. This paper contributes to the literature by conducting a detailed analysis of monetary policy credibility as a key explanatory factor in South Africa, something few other authors have done. Fiscal credibility and central bank credibility: How do we build them? Kabundi , A. Central bank independence Central banking and monetary issues Exchange rate pass-through Exchange rate policy Inflation targeting Monetary policy Nominal effective exchange rate Unit labor cost. Magud, and F.
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In addition, we use one-year moving averages of the credibility in the analysis given that the original series is stationary. IMF eLibrary. Conversely, periods of relatively low and stable inflation coincide with low disagreements, except in Q1 and Q1. JEL: O Publishing With Us.
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Ricci, L. Journal of International Money and Finance, 32 1 , — These include the systematic publication of macroeconomic assumptions and forecasts after each monetary policy committee meeting and a press conference, complemented by a detailed analysis of prevailing macroeconomic conditions in its six-monthly monetary policy review. But recall that there is a positive relationship at the beginning of the sample, which is somewhat misleading. The authorities can therefore mainly focus domestic factors over which they have greater control. Figure 3 represents the two measures of forecast disagreements based on stand deviation and interquartile range of forecasts across agents, and inflation.
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Following Kabundi and Mbelu , we use quarterly data from South Africa, observed from Q1 to Q2 to obtain the time-varying ERPT based on a year rolling window regression, specified in equations 10 and It is followed by downward trend in the ERPT while at the same time credibility improves, reaching the peak in before starting its decline in Q2, just before the GFC. A proper understanding of exchange rate pass-through to inflation in an emerging market country like South Africa is important for policy makers. Stock , J. PAGE 1. This paper aims to analyze the key factors that explain the documented decline in the pass-through in South Africa.
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