Is South Africa's inflation target too persistent for monetary policy conduct?

Faul, Joseph and Khumalo, Bridgette and Pashe, Mpho and Khuzwayo, Miranda and Banda, Kamogelo and Jali, Senzo and Myeni, Bathandekile and Pule, Retlaodirela and Mosito, Boitshoko and Jack, Lona-u-Thando and Phiri, Andrew (2014): Is South Africa's inflation target too persistent for monetary policy conduct?

Abstract

Can the South African Reserve Bank’s (SARB) substantially control inflation within their set target of 3-6 percent? We sought to investigate this phenomenon by examining multiple threshold effects in the persistence levels of quarterly aggregated inflation data collected between 2003 and 2014. To this end, we employ the three-regime threshold autoregressive (TAR) model of Hansen (2000). We favour this approach over other conventional linear econometric models as it permits us to test for varying persistency within the autoregressive (AR) components of the inflation process. Our empirical explorations reveal that the SARB’s set target does indeed lie within a range in which inflation is found to be most persistent. Overall and more importantly, our results suggest that the SARB should either consider revising their set inflation target by redefining the inflation target range to accommodate higher inflation rates or the Reserve Bank should consider abandoning the inflation targeting regime altogether.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation persistence; TAR Models; Monetary Policy; South African Reserve Bank (SARB); Inflation Targeting; Developing Economy.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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