Abstract:
This paper derives the econometric restrictions imposed by the Barro and Gordon (1983)
model of dynamic time inconsistency on a bivariate time-series model of Consumer Price
Index (CPI) inflation and real Gross Domestic Product (GDP), and tests these
restrictions based on quarterly data for South Africa covering the period of 1960:01
through 1999:04, i.e., for the pre-inflation targeting period. The results show that the data
are consistent with the short- and long-run implications of the theory of time-consistent
monetary policy. Moreover, when the model is used to forecast one-step-ahead inflation
over the period of 2001:01 to 2008:02, i.e., the period covering the starting point of the
inflation targeting regime till date we, on average, obtain lower rates of inflation. The
result tends to suggest that the South African Reserve Bank (SARB), perhaps needs to
manage the inflation targeting framework better than it has done so far.
