Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa
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Date
Authors
Naraidoo, Ruthira
Raputsoane, Leroi Jeremia
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
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.
Description
Keywords
Monetary policy preferences, Target zones, Asymmetry
Sustainable Development Goals
Citation
Naraidoo, R., Raputsoane, L., Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa, Economic Modelling, vol. 28, no. 1-2, pp. 251-258. (2011), doi:10.1016/j.econmod.2010.09.005