Are monetary policy regimes optimal

Abstract

The primary aim of monetary policy decisions made by central banks is to keep inflation low and, in doing so, to protect the currency. There have been multiple methods in which developed and developing economies have gone about this endeavour. Literature presented in the research provides evidence that inflation targeting appears to be more optimal than non-inflation targeting regimes. The South African experience shows periods of high inflation in the late 1970Õs and 1980Õs. This leads us to believe that monetary policy was perhaps not implemented as optimally as it could have been. With this in mind, and based on the assumption on that central banks act optimally (Mishkin, 2017), the research applies the Taylor Rule and regression testing to determine whether the decisions made by the South African Reserve Bank were optimal. The research finds that over the period of 1960 to 2016, during which South Africa went through four different monetary policy regimes as well as a change of government and reintegration to the international community, monetary policy was implemented optimally.