Monetary policy credibility and exchange rate pass-through in south africa

Following the finding in Kabundi and Mbelu that exchange rate pass-through to consumer inflation has declined considerably in South Africa since the adoption of the inflation targeting framework in the early , this paper proposes to examine the role of monetary policy credibility in explaining this outcome. Understanding this phenomenon is important in assessing the effectiveness of monetary policy in South Africa. Specifically, forecasting of the effects changes in monetary policy on inflation has to incorporate the declining pass-through. A proper understanding of exchange rate pass-through to inflation in an emerging market country like South Africa is important for policy makers.

Exchange Rate, Second Round Effects and Inflation Processes

Alain N. Kabundi ; Montfort Mlachila. Free Download. Disclaimer: IMF Working Papers describe research in progress by the author s and are published to elicit comments and to encourage debate.

This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which coincides with the adoption of the inflation-targeting regime. The paper conjectures, in line with the literature, that this outcome is largely due to improved monetary policy credibility. To do this, it first documents the factors that explain monetary policy credibility. Using the standard deviation of individual inflation forecasts as a measure of monetary policy credibility, its shows that the latter is negatively affected by the level of inflation itself, monetary policy uncertainty, and a measure of the unobserved stochastic volatility of inflation.

The second phase proceeds by analyzing the determinants of the pass-through using the monetary policy credibility index derived from the first phase. The paper confirms the remarkable achievement that, despite the many shocks that the economy has witnessed, the declining pass-through is indeed explained by the improving monetary policy credibility.

Central bank independence Central banking and monetary issues Exchange rate pass-through Exchange rate policy Inflation targeting Monetary policy Nominal effective exchange rate Unit labor cost.

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This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which coincides with the adoption of the inflation-targeting regime. This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which.

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Alain N. Kabundi ; Montfort Mlachila.

Only This book focuses on the exchange rate pass-through ERPT , second round effects and the inflation process in South Africa. The authors demonstrate that magnitudes of the second round effects of the exchange rate depreciation and oil price shocks depend on inflation regimes.

IMF Working Papers

This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which coincides with the adoption of the inflation-targeting regime. The paper conjectures, in line with the literature, that this outcome is largely due to improved monetary policy credibility. To do this, it first documents the factors that explain monetary policy credibility. Using the standard deviation of individual inflation forecasts as a measure of monetary policy credibility, its shows that the latter is negatively affected by the level of inflation itself, monetary policy uncertainty, and a measure of the unobserved stochastic volatility of inflation. The second phase proceeds by analyzing the determinants of the pass-through using the monetary policy credibility index derived from the first phase. The paper confirms the remarkable achievement that, despite the many shocks that the economy has witnessed, the declining pass-through is indeed explained by the improving monetary policy credibility.

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We find that strong weak fiscal policy credibility leads to a significant exchange rate appreciation depreciation , reduces increases inflation and lowers inflation expectations. Evidence based on the counterfactual VAR model shows that improvements in fiscal policy credibility neutralise the transmission of exchange rate depreciation shocks to inflation and inflation expectations especially in the high inflation regime. Thus, we conclude that strengthening fiscal policy credibility is needed to reduce the exchange rate pass-through to inflation and inflation expectations and this assists monetary policy authorities in achieving the price stability mandate. Skip to main content. Advertisement Hide. Chapter First Online: 24 April This is a preview of subscription content, log in to check access. Catao, L.