Estimating Monetary Policy Rules for South Africa

Abstract

Monetary policy in South Africa’s emerging market economy, given capital account liberalization and severe constraints on fiscal policy, has the major responsibility for curbing inflation and currency instability while trying to ensure sufficient growth for longer-term political stability and the reduction of poverty. South Africa’s monetary policy is going through a rapid transition away from an old-fashioned, partly monetarist view that assumed a simple connection between the money supply and inflation. Accumulated international evidence does not support this view, and in South Africa itself the force of circumstance has recently compelled a move away from these ideas. The shift to a regime with an explicit, publicly announced inflation goal in late 1999 demands good forecasting models of inflation, using all available information to guide policy rather than a single intermediate target such as a monetary aggregate. Important, too, is a shared understanding with the private sector of the effectiveness of monetary policy for inflation, as well as greater policy transparency and more open public discussion of the underlying issues (see, among others, Leiderman and Svensson,

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