A STOCHASTIC ESTIMATION FRAMEWORK FOR COMPONENTS OF THE SOUTH AFRICAN CONSUMER PRICE INDEX

Under inflation targeting in South Africa, it is important to monitor and forecast changes in prices, not only for aggregate measures of the consumer price index, but also its underlying sub-components. Hypotheses about sectoral transmission of policy and shocks are often more specific than hypotheses about overall transmission. This study employs a stochastic framework to estimate richly specified equilibrium correction models, four-quarters-ahead, for the 10 sub-components of the first targeted measure of the consumer price index, CPIX. The stochastic trends are estimated by the Kalman filter, and interpreted as capturing structural breaks and institutional change, a frequent cause of forecast failure. The trends suggest the design of deterministic split trends for use in recursive forecasting models, towards more accurate overall inflation forecasting. This research also has practical use for monetary policy in allowing identification of sectoral sources of inflation.     

Comparing monetary policy transmission across European countries

Comparing Monetary Policy Transmission across European Countries. — This paper re-evaluates the estimation of monetary policy transmission. Within the Structural VAR framework, five methodological points are identified, recognition of which can help to improve the reliability and credibility of estimates. The findings of the methodological analysis are applied to the estimation of models for thirteen European countries. Results show that considerable differences in the transmission mechanism exist between these economies, mainly in intensity, but also in timing.     

CAN A RULE‐BASED MONETARY POLICY FRAMEWORK WORK IN A DEVELOPING COUNTRY? THE CASE OF YEMEN

Monetary policy in Yemen is largely rudimentary and ad hoc in nature. The Central Bank of Yemen's (CBY) approach has been based on discretionary targeting of broad money without any clear target to anchor inflation expectations. This paper argues in favor of a new formal monetary policy framework for Yemen emphasizing a proactive and rule‐based approach with a greater direct focus on price stability in the context of a flexible management of the exchange rate. Although, as in many developing countries, institutional capacity is a concern, adopting a more formal framework could impel the kind of changes that are required to strengthen the ability of the CBY in achieving low and stable rates of inflation over the medium term.     

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.     

CAN TUNISIA MOVE TO INFLATION TARGETING?

Inflation targeting has become an alternative monetary strategy that has been followed by many industrial and emerging countries. This study considers whether the adoption of inflation targeting would be relevant for Tunisia. More specifically, this paper aims at checking whether the necessary conditions for the successful implementation of such a strategy are fulfilled or not. It is found that fiscal dominance does not constitute the main hindrance to the adoption of inflation targeting. Other impediments have been identified, especially a weak financial system in general, the unsound and fragile banking system in particular, and the glaring lack of knowledge about the monetary transmission mechanism. Furthermore, it has been pointed out that if Tunisian monetary authorities continue to carry out the present exchange rate regime, namely, the constant real exchange rate rule, an inflation targeting regime will not be sufficient to properly contain the inflation pressures caused by demand shocks.     

Interaction between structural and cyclical shocks in production and employment

Interaction between Structural and Cyclical Shocks in Production and Employment. — A major aim of recent empirical modelling of the business cycle is to identify the relative importance of aggregate supply and demand shocks. This paper uses the methodology of unobserved (or structural) components time series models for the identification of technology and demand shocks in a two-equation system of structural labour productivity and industrial output. It allows us to introduce the correlation between the structural and cyclical shocks such that the mutual dependency of these shocks can be estimated explicitly. The data is quarterly time series of labour productivity in industry and industrial output for Germany, the Netherlands, the United Kingdom and the United States. Our results show that the covariance of the dynamics of structural and cyclical shocks appears to be important in these countries.     

The domestic term structure and international interest rate linkages: A cointegration analysis

The Domestic Term Structure and International Interest Rate Linkages. A Cointegration Analysis. -This paper analyzes cointegration relations between domestic interest rates with different maturities and between the US and German interest rates of the same maturity by means of the Johansen procedure and single-equation error correction models. It analyzes also the implied common stochastic trends. The author concludes that in the long run, interest spreads within both countries strongly dominate and linkages between the interest rates of both countries are only important in the short run.     

Will the Sarb always Succeed in Fighting Inflation with Contractionary Policy?

The conventional view is that a monetary policy shock has both supply‐side and demand‐side effects, at least in the short run. Barth and Ramey show that the supply‐side effect of a monetary policy shock may be greater than the demand‐side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation. We estimate a standard New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy for the South African economy to show that whether the South African Reserve Bank should apply contractionary policy to fight inflation depends critically on the nature of the disturbance. If an increase in expected future inflation is mainly due to supply shocks, the South African Reserve Bank should not apply contractionary policy to fight inflation, as this would lead to a persistent increase in inflation and a greater loss in output. Our estimation results also show that with a moderate level of cost‐channel effect and nominal rigidities, a New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy is able to mimic the price puzzle produced by an estimated vector autoregressive model.     

THE ROLE OF COMMODITY PRICES IN MACROECONOMIC POLICY IN SOUTH AFRICA

This paper examines whether commodity prices can be used as signal for informing macroeconomic policy in South Africa using the new approach for testing Granger causality developed by Toda and Yamamoto (1995 ). Evidence of causality from average gold price to interest rate, money, exchange rate and the consumer price index was observed. Again, evidence of causality was observed from metals price index to interest rate, money and exchange rate. The results suggest there is merit in using South Africa's average gold price and the metals price index of the International Monetary Fund as informational variables in setting monetary policy.     

Bankruptcy dynamics in Japan

This paper attempts to enhance our understanding of macro aspects of bankruptcies in Japan. For this purpose, we estimate a vector autoregression comprised of three macroeconomic variables, two financial variables from the corporate sector and the bankruptcy rate, and construct its impulse responses. The estimation results generally show expected and consistent relationships between economic shocks and aggregate bankruptcies: in particular, a positive shock in the call rate clearly raises the bankruptcy rate. We also estimate industry-level models for manufacturing, construction, and wholesale and retail trade, the results of which show fundamental similarities, but differences as well, in the details by industry. We try to apply a standard framework for analysis aimed at establishing a clear benchmark for the study.