Inflation targeting

This paper analyses the evolution of the monetary policy stance, communication and credibility of the South African Reserve Bank (SARB) since 2000, when it adopted a flexible Inflation Targeting (IT) regime to facilitate the achievement of its price stability mandate. Empirical results indicate that the stance became accommodative after the global financial crisis of 2009, with a tendency of the implicit inflation target to increase, while after 2014 it turned tighter and the implicit target started declining.

At what level does a currency’s volatility become ‘excessive’, in a concrete sense? Any claim that an exchange rate is excessively volatile needs a benchmark for ‘normal’variability. We compute variance bounds implied by exchange rate models as the norm, for a set of particularly volatile emerging market currencies; and a…nd that long-run exchange rate volatility does not breach the upper bound implied by the present value of underlying fundamentals –for each currency in our sample, except the Brazilian real. However, nominal exchange

A nominal income target may provide credibility to a commitment to keep real interest rates exceptionally low, until a target output level is reached -–even if expected inflation rises in the interim–- in economies where nominal interest rates are effectively at the zero lower bound, which is not the South African case. There are practical difficulties with adopting nominal income targeting as the monetary policy framework. These include issues on the choice of a target level, risk of unanchored in‡ation expectations, and increased likelihood of error due to data uncertainty and revisions.

We examine the high-frequency response of the rand-dollar nominal rate within ten-minute intervals around (five minutes before, five minutes after) official inflation announcements, and show that the rand appreciates (respectively, depreciates) on impact when inflation is higher (respectively, lower) than expected. The effect only applies after the adoption of inflation targeting, and is stronger for good news.

The conventional view is that a monetary policy shock has both supply-side and demand-side effects, at least in the short run. Barth and Ramey (2001) show that the supply-side effect of a monetary policy shock may be greater than the demand-side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation.