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Estimating monetary policy rules for South Africa

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  • Janine Aron
  • John Muellbauer

Abstract

South African monetary policy has experienced major shifts, with three broad monetary policy regimes since the 1960s. This paper analyses the conduct of monetary policy, describing the historical record and institutions of monetary policy, and formally modelling extended Taylor rules for interest rate policy formation. Our principal interest is in the second regime (prior to inflation targeting), when the short-term interest rate first became the main monetary policy instrument, with reference to monetary targets and an eclectic set of economic indicators. Policy was opaque in this regime, and has never been studied in the context of rigorous empirical models. Taylor rules, augmented for foreign interest rate influences and interest rate smoothing, and based either on forecast, or actual, inflation and output gap measures, poorly describe the behavior of the discount rate. A satisfactory model includes the deviation of money growth from target in the rule and controls for the extensive financial liberalisation occurring in the period. In practice, the central bank emphasized current inflation, giving a low weight to the output gap. We find weak evidence for structural breaks reflecting competing balance of payments considerations.
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  • Janine Aron & John Muellbauer, 2001. "Estimating monetary policy rules for South Africa," CSAE Working Paper Series 2001-07, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2001-07
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    Cited by:

    1. Knedlik, Tobias, 2006. "Signaling Currency Crises in South Africa," IWH Discussion Papers 19/2006, Halle Institute for Economic Research (IWH).
    2. Samuel Addo, 2018. "Policy regime changes and central bank prefernces," Working Papers 752, Economic Research Southern Africa.
    3. Ruch,Franz Ulrich, 2021. "Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies," Policy Research Working Paper Series 9711, The World Bank.
    4. BONGA-BONGA, Lumengo & GUMA, Nomvuyo, 2017. "The Relationship Between Savings And Economic Growth At The Disaggregated Level," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 70(1), pages 1-24.
    5. Peter Aling & Shakill Hassan, 2012. "No-Arbitrage One-Factor Models Of The South African Term Structure Of Interest Rates," South African Journal of Economics, Economic Society of South Africa, vol. 80(3), pages 301-318, September.
    6. Aron, Janine & Muellbauer, John & Murphy, Anthony, 2006. "Housing wealth, credit conditions and consumption," MPRA Paper 24485, University Library of Munich, Germany.
    7. Naraidoo, Ruthira & Paya, Ivan, 2012. "Forecasting monetary policy rules in South Africa," International Journal of Forecasting, Elsevier, vol. 28(2), pages 446-455.
    8. Janine Aron & John Muellbauer, 2007. "Review of Monetary Policy in South Africa since 1994," Journal of African Economies, Centre for the Study of African Economies, vol. 16(5), pages 705-744, November.
    9. Ellyne, Mark & Veller, Carl, 2011. "What is the SARB's inflation targeting policy, and is it appropriate?," MPRA Paper 42134, University Library of Munich, Germany.
    10. Ruthira Naraidoo & Ivan Paya, 2010. "Forecasting Monetary Rules in South Africa," Working Papers 201007, University of Pretoria, Department of Economics.
    11. Tumisang Loate & Ekaterina Pirozhkova & Nicola Viegi, 2021. "Sailing into the Wind evaluating the near future of Monetary Policy in South Africa," Working Papers 11006, South African Reserve Bank.
    12. Mohimont, Jolan, 2022. "Welfare effects of business cycles and monetary policies in a small open emerging economy," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    13. Farhan Abdi Omar & Abdishakur Mohamed Hussein, 2020. "The Stability of Money Demand Function: Evidence from South Africa," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 16-22.
    14. Anja Shortland & David Stasavage, 2004. "Monetary Policy in the Franc Zone: Estimating Interest Rate Rules for the BCEAO," WIDER Working Paper Series RP2004-20, World Institute for Development Economic Research (UNU-WIDER).
    15. Muellbauer, John & Aron, Janine, 2006. "Review of Monetary Policy in South Africa: 1994-2004," CEPR Discussion Papers 5831, C.E.P.R. Discussion Papers.
    16. Bhorat, Haroon & Hirsch, Alan & Kanbur, Ravi & Ncube, Mthuli, 2014. "Economic Policy in South Africa: Past, Present, and Future," Working Papers 180150, Cornell University, Department of Applied Economics and Management.
    17. Alberto Coco & Nicola Viegi, 2019. "The monetary policy of the South African Reserve Bank: stance, communication and credibility," Working Papers 788, Economic Research Southern Africa.
    18. Janine Aron & John Muellbauer, 2007. "Review of Monetary Policy in South Africa since 1994," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 16(5), pages 705-744, November.

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