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Monetary policy and inflation in South Africa: A VECM augmented with foreign variables
Authors:Annari de Waal  Reneé van Eyden
Affiliation:Department of Economics, University of Pretoria, , South Africa
Abstract:We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, known as an augmented VECM or VECX*, suitable for a small open economy like South Africa. This model is novel for South Africa in two ways: it is the first VECX* developed to analyse monetary policy and the first model that uses time‐varying trade weights to create the foreign series. We impose three significant long‐run relations (augmented purchasing power parity, uncovered interest parity and Fisher parity) to investigate the effect of a monetary policy shock on inflation. The results suggest the effective transmission of monetary policy.
Keywords:C50  E52  South Africa  monetary policy  structural cointegrated vector autoregressive model  augmented VECM  VECX*
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