Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa |
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| Authors: | Ruthira Naraidoo Leroi Raputsoane |
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| Institution: | 1. University of Pretoria, Department of Economics, Pretoria, 0002, South Africa;2. Research Department, South African Reserve Bank, Pretoria, 0001, South Africa;1. Unidade de Pesquisa e Tratamento das Epilepsias, Department of Neurology and Neurosurgery, Universidade Federal de São Paulo (UNIFESP), São Paulo, SP, Brazil;2. Department of Psychiatry, Universidade Federal de São Paulo (UNIFESP), São Paulo, SP, Brazil;3. Department of Neurology, Danish Epilepsy Centre, Dianalund, Denmark;4. Department of Clinical Medicine, Neurological Service, Universidade Federal de Santa Catarina, Florianópolis, SC, Brazil;1. Department of Physics, University of Jammu, Jammu, 180 006, India;2. Department of Physics, Panjab University, Chandigarh, 160 014, India;1. Instituto de Química de São Carlos, Universidade de São Paulo, CP 780, CEP 13560-970, São Carlos, SP, Brazil;2. Departamento de Física, Química e Biologia, Faculdade de Ciências e Tecnologia, Universidade Estadual Paulista, CEP 19060-900, Presidente Prudente, SP, Brazil;1. New Jersey Institute of Technology, Newark, NJ 07102, USA;2. Stanford University, Stanford, CA 94305, USA |
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| Abstract: | This paper estimates the optimal response of the SARB to deviations of inflation and output from their target values over the inflation targeting era. This is achieved using an empirical framework that allows the central bank's policy preferences to be zone-like and asymmetric. The first major finding is that the monetary authorities' response towards inflation is zone symmetric. That is, they react in a passive manner when inflation is within the target band whereas they become increasingly aggressive when it deviates from the target band. The monetary authorities also react with the same level of aggressiveness regardless of whether inflation overshoots or undershoots the inflation target band. The second major finding is that the monetary authorities' response to output fluctuations is asymmetric. That is, they react more aggressively to negative deviations of output from the potential so that they weigh business cycle recessions more than expansions. |
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