Central bank independence in an inflation targeting regime : an assessment of South Africa's central Bank independence

Abstract

Since the early 1990’s IT has particularly become popular with most central banks, largely due to a failure of both monetary aggregate and exchange rate policies in bringing about price stability ( Angeris and Arestiz, 2005).The literature, however raises concerns about the ability of emerging markets in implementing inflation targeting (Mishkin, 2004). In particular, concerns are raised about the commitment to maintain central bank independence, identified as a crucial pre-requisite in the implementation of IT. South Africa, implemented IT in February 2000 and it being an emerging market, questions about the level of the independence of the central bank are relevant. To assess legal independence an index developed by Cukierman (Cukeirman, 1992) is used. In assessing actual independence, two approaches are used. These included interviews with a representative from the South African Reserve Bank (SARB) as well as eleven economists from the private and academic sector. Findings reveal a central bank that has significantly higher actual independence than legal independence, a strange phenomenon for an emerging market. The Bank seems to have largely succeeded in maintain its independence since the implementation of inflation targeting despite the fact that South Africa is an emerging market. The lower legal score, however, raises concerns about the lack of sufficient provision for independence of the central bank in the law.