An empirical analysis on the effects of the inflation targeting framework on monetary policy in South Africa

• Published date: 01 December 2019
• Date: 01 December 2019
• DOI: http://doi.org/10.1111/saje.12234
• Author: Kenneth Creamer,Weiming Chen

© 2019 Economic Society of South Africa.

South African Journal of Economics Vol. 87:4 December 2019

doi: 10.1111/saje.12234

450

AN EMPIRICAL ANALYSIS ON THE EFFECTS OF THE

INFLATION TARGETING FRAMEWORK ON MONETARY

POLICY IN SOUTH AFRICA

WEIMING CHEN† AND KENNETH CREAMER*,†

Abstract

This article examines the impact of the adoption of an Inflation Targeting (IT) framework in 2000

on the conduct of South Africa’s monetary policy. Taylor rule analysis is used to test empirically

whether the implementation of IT in South Africa can be shown to have impacted on the conduct

of monetary policy. In particular, the article analyses whether the implementation of the IT

framework yields the expected changes when comparing the conduct of monetary policy pre and

post the adoption of the IT framework. Thereafter, an analysis of term structure of interest rates,

which serve as a proxy variable for market expectations, is used to test whether South Africa’s

IT framework has resulted in more predictability and transparency in monetary policy conduct.

Lastly, the article analyses the impact of the global financial crisis of 2008–2009, the so-called

Great Recession, on the predictability and transparency of monetary policy in South Africa.

JEL Classification: E5, E52, E58

Keywords: Monetary Policy, inflation targeting framework, Taylor rule, term structure of interest rates,

predictability, transparency, market expectations

1. INTRODUCTION

South Africa embraced the Inflation Targeting (IT) framework, in 2000, following the

Asian Crisis in the late 1990s. During the crisis, the SARB followed a so-called “eclectic”

mandate and increased interest rates sharply to promote capital inflows and also bor-

rowed USD 25 billion to purchase Rands in the foreign currency market in a bid to avoid

a currency depreciation. The effort was ineffective and resulted in a sharp depreciation

of the Rand. After this failed, and costly, attempt at targeting the currency, the SARB

adopted an IT framework which focused monetary policy primarily on keeping inflation

within a target range.

Table 1 compares key macroeconomic data before and after the adoption of the IT

framework in South Africa in 2000. The average rate of inflation in the IT period has

declined as compared to the pre-IT period. It is noteworthy that during the IT period,

the average rate of inflation falls within the inflation target range from 3% to 6%.

* Corresponding author: Kenneth Creamer, School of Economic and Business Science, New

Commerce Building, West Campus, University of the Witwatersrand, 1 Jan Smuts Avenue,

Johannesburg 2000, South Africa. Tel: 0117171000. E-mail: kenneth.creamer@wits.ac.za

† University of the Witwatersrand

South African Journal

of Economics