De Waal, AnnariVan Eyden, Renee2014-07-042014-03De Waal, A & Van Eyden, R 2014, 'Monetary policy and inflation in South Africa : a VECM augmented with foreign variables', South African Journal of Economics, vol. 82, no. 1, pp. 117-140.0038-2280 (print)1813-6982 (online)10.1111/saje.12027http://hdl.handle.net/2263/40547We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, known as an augmented VECM or VECX*, suitable for a small open economy like South Africa. This model is novel for South Africa in two ways: it is the first VECX* developed to analyse monetary policy and the first model that uses time-varying trade weights to create the foreign series.We impose three significant long-run relations (augmented purchasing power parity, uncovered interest parity and Fisher parity) to investigate the effect of a monetary policy shock on inflation. The results suggest the effective transmission of monetary policy.en© 2013 Economic Society of South Africa.. The definite version is available at : http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1813-6982.Monetary policyStructural cointegrated vector autoregressive modelAugmented VECMVECX*South Africa (SA)Preprint Article