THE SENSITIVITY OF SOUTH AFRICAN INFLATION EXPECTATIONS TO SURPRISES

Price stability is widely recognised as the primary goal of modern monetary policy, and the management of private sector inflation expectations has become an essential channel through which this goal is achieved. This evaluation aims to improve the understanding of how the sensitivity of private sector inflation expectations to macroeconomic surprises in South Africa compares internationally, as this provides an indication of the contribution of monetary policy in South Africa to anchoring inflation expectations. If a central bank is credible, the financial markets should react less sensitively to macroeconomics surprises, because they trust the central bank to manage these incidents and achieve the objectives they communicated over the medium to long term. In this paper, the methodology of Gurkaynack et al. is adopted in order to measure the sensitivity of South African inflation expectations to surprises. A comparison of South Africa's results with those of countries in the original studies supports the contention that the SARB (South African Reserve Bank) has encouraged inflation expectations to be relatively insensitive to macroeconomic surprises, and offers support for the inflation-targeting framework as a means to help anchor inflation expectations.     

Inflation Targeting and the Pass‐through Rate in East Asian Economies

There has been serious debate regarding whether the inflation targeting (IT) framework for the emerging market economies has been an effective nominal anchor. Focusing on Korea, Thailand and the Philippines, this article aims to contribute to the debate by providing empirical evidence on a decline in the ‘pass‐through’ effect with IT adoption. Our main findings are as follows. First, under the IT framework, Korea has followed an inflation responsive rule in a forward‐looking manner, while Thailand has adopted the rule in a backward‐looking manner. Second, only Korea experiences a reduction in the pass‐through effect under IT adoption, thereby showing a linkage between the forward‐looking inflation responsive rule and the pass‐through effect. Finally, a test of the sensitivity of inflation expectations to external price shocks in Korea supports this linkage.     

Inflation Targeting and Relative Price Variability: What Difference Does Inflation Targeting Make?

This article studies the effects of inflation targeting (IT) on relative price variability (RPV) using a data set of twenty countries comprising both targeters and nontargeters. We find that a decline in mean inflation after IT adoption is not necessarily associated with a similar fall in RPV and that what matters most for the structural changes in RPV is the initial inflation regime prior to the adoption of IT rather than IT adoption itself. IT adoption impacts the shape of the underlying relationship between inflation and RPV in countries with initially high inflation rates, moving it from monotonic to the U‐shaped profile observed consistently for countries with low‐inflation regimes. The minimum point of this U‐shaped curve is indicative of the public's expectations of inflation and is very close to the announced target for inflation in most of the countries we study.     

ESTIMATING SARB'S POLICY REACTION RULE

This paper uses a Dynamic Stochastic General Equilibrium (DSGE) model to estimate the South African Reserve Bank's (SARB) policy reaction rule. We find that the SARB has a stable rule very much in line with those estimated for Canada, UK, Australia and New Zealand. Relative to other emerging economies the policy reaction function of the SARB appears to be much more stable with a consistent anti inflation bias, a somewhat larger weight on output and a very low weight on the exchange rate.     

INFLATION TARGETING AND THE FISHER EFFECT IN SOUTH AFRICA: AN EMPIRICAL INVESTIGATION

The paper analyses the relationship between expected inflation and nominal interest rates during a period of inflation targeting in South Africa, i.e. from 2000 to 2005. Specifically, it investigates the Fisher hypothesis that nominal interest rates move one‐to‐one with expected inflation, leaving the real interest rate unaffected. The analysis distinguishes between a short‐run Fisher effect and a long‐run Fisher effect. Using cointegration and error correction models (for monthly data for the period April 2000 to July 2005), it was found that the short‐run Fisher hypothesis did not hold during the relevant period under the inflation targeting monetary policy framework in South Africa. This is attributed to a combination of the South African Reserve Bank's (SARB) control over short‐term interest rates and the effects of the monetary transmission mechanism. The long‐run Fisher hypothesis could not be confirmed in its strictest form: while changes in inflation expectations move in the same direction as the nominal long‐term interest rate. This suggests that monetary policy has an influence on the real long‐term interest rate, which has positive implications for general economic activity, thus confirming the credibility of the inflation targeting framework.     

LOUD AND CLEAR? CAN WE HEAR WHEN THE SARB SPEAKS?

Inflation targeting is a forward‐looking framework for monetary policy that has brought unprecedented transparency to the process of monetary policy. This paper aims to assess the degree to which the South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) has, since the introduction of inflation targeting, successfully communicated to the public its policy analysis, and, in particular, the expected future policy changes. It follows international literature in constructing a numerical index that is used to reflect the information content of the SARB's communications, specifically the monetary policy statements that accompanied each of the MPC meetings since 2000. This method allows us to judge, systematically, the degree to which the MPC has communicated successfully, and the evolution of that success over the past nine years. We find evidence that the MPC has succeeded in signalling their likely future policy decision with consistency over this period.     

Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data

This paper uses the European Commission’s Consumer Survey to assess whether inflation expectations have converged and whether inflation uncertainty has diminished following the introduction of the euro in Europe. Consumers’ responses to the survey suggest that inflation expectations depend more on past national inflation rates than on the ECB’s anchor for price stability. Inflation expectations do not converge significantly faster than actual inflation rates. Regarding inflation uncertainty, the data indicate a relationship with country size following the introduction of the euro. This suggests that within EMU, inflation uncertainty may increase in countries that have a smaller influence on ECB policy. JEL no.  D84, E31, E58     

Inflation Uncertainty and Monetary Policy in China

This paper uses a stochastic volatility model structural break tests with unknown point, and a counterfactual simulation method to discuss the significant decline in inflation uncertainty in China over 1978-2009. We attempt to quantify the contributions of better monetary policy and smaller structural shocks （including demand, supply and policy impacts） on the reduced inflation uncertainty. Empirical results in the present paper suggest that improved monetary policy accounts for only a small fraction of the reduction in inflation uncertainty from the pre-1997 period to the post-1997 period in China. The bulk of the significant moderation in inflation uncertainty arises from smaller shocks. This finding indicates that the quiescence of inflation in China over the past decade could well be followed by a return to a more turbulent inflation era. Therefore, the use of preemptive monetary policy to anchor inflationary expectations and keep moderate inflation uncertainty is warranted.     

Inflation and relative price variability: Evidence for India

This study decomposes relative price variability into a component due to inflation and a component due to real factors. The empirical results for India suggest that real factors account for 55% and inflation accounts for 45% of the variability in relative price changes. The proportion of inflation induced relative price variability increases with the rise in inflation, implying that inflation has distortionary effects on the structure of relative prices. Further, larger part of variability in the relative price changes seems to have been generated by fluctuations in the relative prices of a few commodities. The sector wise analysis shows that the major share of total relative price variability is contributed by fluctuations in the prices of manufactured products. The more crucial inference that emerges from the empirical analysis is that the inflation rate at which variability of relative price changes is minimum is found to be 4.5%, which is consistent with the official threshold rate often claimed by the Reserve Bank of India.     

Causes of Inflation in China： Inflation Expectations

This paper argues that the main causes of inflation in China since the early 21st century are changes in the public's inflation expectations. The conventional wisdom, the quantity theory of money, may not be adequate to capture the relationship between price changes and money supply growth, as the economic system evolves and people's income and wealth grow. An examination of China's GDP deflator and broad money supply relative to nominal GDP shows that the relationship between the two series is relatively weak. A further examination of China's monthly CPI series over the period 2001–2010 reveals that the autoregressive models are a better fit than the moving average models, which suggests that the role of CPI expectations has been significant and important. Because of the importance of inflation expectations in CPI movement, we believe the Central Bank's monetary policy that targets CPI inflation should emphasize the use of policy instruments that have direct and strong communication links with the public. Quantitative measures would have their own use, but their effectiveness would be unlikely to match that of interest rate measures, especially from a short‐term perspective.     

Measuring Core Inflation in South Africa

Measures of core inflation convey critical information about an economy. They have a direct effect on the policymaking process, particularly in inflation‐targeting countries, and are utilised in forecasting and modelling exercises. In South Africa, the price indices on which inflation is based have been subject to important structural breaks following changes to the underlying basket of goods and the methodology for constructing price indices. This paper seeks to identify a consistent measure of core inflation for South Africa using trimmed means estimates, measures that exclude changes in food and energy prices, dynamic factor models, and wavelet decompositions. After considering the forecasting ability of these measures, which provide an indication of expected second‐round inflationary effects, traditional in‐sample criteria were used for further comparative purposes. The results suggest that wavelet decompositions provide a useful measure of this critical variable.     

Inflation targeting in Indonesia, 1999–2012: an ex-post review

Around the end of 1999, Bank Indonesia (BI) adopted inflation targeting as part of its approach to monetary policy. This article reviews the experience up to 2012, examines BI's performance in hitting its inflation targets and considers certain broader indicators of success. Overall, inflation targeting in Indonesia has been a messy, evolutionary process, and BI's implementation record compares unfavourably with that of its peers. Yet Indonesia recorded a significant downward trend in inflation during this period and maintained strong economic growth. Also, almost all of its inflation-targeting arrangements are now in line with common international practice. Looking ahead, this article offers suggestions for sustaining progress in inflation targeting, such as setting more ambitious targets in the outer years and implementing strong policies to reduce inflation further, including after large administrative price shocks.     

The Impact of EMU on Inflation Expectations

This paper analyses the impact of the monetary regime change from the Bundesbank to the ECB on inflation expectations. In the theoretical part, the Barro-Gordon model is used to derive the potential effect of a new central bank on inflation and inflation expectations. The econometric investigation is based on a flexible specification of expectation formation which allows both for rational and adaptive elements. The results indicate that the monetary regime change did not have a strong and lasting impact on the formation of inflation expectations and that the credibility of both central banks is not perceived to differ significantly anymore. JEL Classification Numbers: E 58, E 31     

Inflation Transmission in Greater China

This paper examines inflation dynamics in Greater China. Using an asymmetric error correction model, we investigate how inflation in Hong Kong and Macao are related to inflation in Chinese Mainland. Our results based on data from July 1997 to December 2012 reveal that a long‐term equilibrium relation exists between inflation in Chinese Mainland and inflation in both Hong Kong and Macao, the two Special Administrative Regions of China. The degree of inflation pass‐through is higher for Macao than for Hong Kong. Moreover, we find no evidence of asymmetries in either Hong Kong and Macao's adjustment speeds towards long‐run equilibrium or in the short‐run pass‐through of accelerating or decelerating inflation in the Mainland. Collectively, our results show a close relationship among price dynamics of the three economies and call for a reconsideration of the exchange rate anchor in the Greater China Region.     

通胀目标制：功能机理、政策绩效与启示

通货膨胀目标制是20世纪90年代初西方发达国家兴起的一种货币政策框架。文章从理论阐释了通胀目标制的功能机理,运用48个国家的相关数据对通胀目标制的绩效进行了实证分析,实证结果表明:通货膨胀目标制有助于锚住通胀预期,降低通货膨胀,稳定产出,是一种比较成功的货币政策框架。这一结论对货币政策框架需要调整的我国具有一定的政策启示。     

Why is Inflation in China a Monetary Phenomenon？

This paper proposes that inflation in China during the post‐reform era (1978 onwards) is always a monetary phenomenon. We construct a multivariate dynamic model based on Friedman's quantity theory of money and use the standard Granger causality test to show that money growth contains significant predictive power for inflation during the underlying period. The finding is robust to alternative measures of monetary aggregates and both closed and open economy frameworks. The baseline finding of the paper indicates that quantitative tools remain the most important policy instruments for China to manage its inflation effectively.     

On Determinacy and Learnability in a New Keynesian Model with Unemployment

We analyse determinacy and stability under learning (E‐stability) of rational expectations equilibria in a new Keynesian model of inflation and unemployment, where labour market frictions due to costs of hiring workers play an important role. We derive results for alternative specifications of monetary policy rules and alternative values of hiring costs as a percentage of gross domestic product. We find that in general the region of indeterminacy and E‐instability in the policy space increases with hiring costs. Thus, higher hiring costs – consistent with European and South African “sclerotic” labour market institutions – seem to play an important part in explaining inflation and unemployment instability. Moreover, under lagged data‐based rules, the area where monetary policy delivers both determinacy and E‐stability shrinks. These rules also perform worse according to these two dimensions when hiring costs go up. Finally, under expectations‐based rules an additional explosive region is introduced. For South Africa, a rule based on current data – not unlike the original Taylor rule – works better than a forward‐looking rule.     

Multiple Structural Breaks and Inflation Persistence: Evidence from China

The degree of inflation persistence fluctuates more in developing countries than in industrialized countries. This is because there are more economic reforms in developing countries than in industrialized countries. Hence, it is important to study the inflation persistence in developing countries. The present paper investigates the pattern of inflation persistence in China, a developing and transitional economy. Specifically, the paper studies statistically the number of structural breaks in China's inflation persistence based on the monthly retail price index (MRPI) and the quarterly retail price index (QRPI) inflation series from 1983 to 2011. The findings show that there are five and three structural breaks in the MRPI and QRPI inflation persistence, respectively. The present paper also exposes a high degree of persistence over the whole sample period and a slight decline in the level of the persistence since 1994. Furthermore, the persistence of two inflation series does not change monotonously but with obvious cyclical patterns. Using these derived estimated structural breakpoints, likely causes of the breakpoints in inflation persistence are investigated. Finally, theoretical and practical implications are discussed.     

The Impact of Inflation Uncertainty on Output Growth and Inflation in Thailand*

We explore the impact of inflation uncertainty on output growth in Thailand, an emerging market economy with moderate inflation. Inflation and output uncertainty are modeled in a bivariate constant conditional correlation generalized autoregressive conditional heteroskedastic (AR(p)‐cccGARCH(1,1)) specification. We include the exchange rate in the mean equations, and use the headline and core inflation rates and industrial production to generate inflation and output uncertainty series. These series are then used in Granger causality tests to make inferences about the effect of monetary policy‐induced inflation uncertainty. Causality tests show a positive relation from inflation to inflation uncertainty. Additionally, increased inflation uncertainty decreases output. These results are consistent with real costs associated with moderate inflation. Finally, we find no evidence that monetary policy reduced these costs.