Monetary policy credibility and exchange rate pass-through in south africa
A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in the early 1980s, see Bernanke (2004). We will argue that the new monetary policy regime has enabled South Africa to participate in these global trends, despite major exchange rate shocks. The outline of the paper is as follows. In Section 2, we review the design and operational framework of monetary policy. The pass-through of exchange rates to inflation was much higher in Mexico than in Canada, Australia, or New Zealand. And this has to do a lot with history, with credibility of monetary policies, and this is one of the big challenges that we Monetary Policy, Exchange Rate Flexibility, and Exchange Rate Pass-Through Michael B. Devereux its policy stance. Aron and Muelbauer (2002) were the first ones to analyse South African monetary policy using a Taylor rule setting, although they showed that the latter was not very suitable for periods dominated by exchange rate management policies and financial repression.
Indeed, the relation between nominal exchange rate changes and price inflation—the exchange rate pass-through, ERPT from now on 1 —can be important in an unstable monetary environment in which nominal shocks fuel both exchange rate depreciation and high inflation.
1. Introduction. Following the finding in Kabundi and Mbelu (2018) 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 2000, this paper proposes to examine the role of monetary policy credibility in explaining this outcome. There is growing literature which argues that this may be This in turn reduces the exchange rate pass-through. This finding is important from a monetary policy perspective not only for South Africa but other emerging economies such as Turkey as it shows that improving monetary policy credibility is a key ingredient to reducing exchange rate pass-through. We find that greater monetary policy credibility affects overall exchange rate pass-through to consumer prices primarily through reductions in second-round effects. 3 These results are robust to the use of our alternative benchmark for second-round effects, which relaxes the assumption of complete pass-through to import prices. A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime's performance in delivering price stability. Evidence shows that the counterfactual consumer price inflation rises more than the actual reaction. This suggests that high monetary policy credibility weakens the size of exchange rate pass-through to inflation. The monetary policy credibility has bigger dampening effects when inflation exceeds 6% than using the 3–6% band or below 6%. The primary objective of monetary policy in South Africa is to achieve and maintain price stability in the interest of sustainable and balanced economic development and growth. Price stability reduces uncertainty in the economy and, therefore, provides a favourable environment for growth and employment creation.
A proper understanding of exchange rate pass-through to inflation in an emerging market country like South Africa is important for policy makers. This is
Jul 30, 2018 This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two South African Reserve Bank. Working Paper Series. WP/18/04. Monetary Policy Credibility and Exchange Rate Pass-. Through in South Africa. Alain Kabundi A proper understanding of exchange rate pass-through to inflation in an emerging market country like South Africa is important for policy makers. This is Apr 12, 2019 This in turn reduces the exchange rate pass-through. This finding is important from a monetary policy perspective not only for South Africa but Exchange Rate Pass-Through and Monetary Policy in South Africa adjust to exchange rates helps anticipate inflation effects and monetary policy responses. This in turn reduces the exchange rate pass-through. This finding is important from a monetary policy perspective not only for South Africa but other emerging
Keywords: exchange rate pass-through, inflation, VAR, Cholesky fixed exchange rate to credible foreign currency represent a crucial role for understanding adjustments of monetary policy framework and exchange rate regime accompanied key targeting versus flexible currency board in Ghana, South Africa and the.
between monetary policy credibility and the exchange rate pass-through in South Africa. Section IV discusses the empirical results, focusing first on determinants of monetary policy credibility, and then the relationship between monetary policy credibility and the exchange rate pass-through. Section V undertakes several robustness checks.
Indeed, the relation between nominal exchange rate changes and price inflation—the exchange rate pass-through, ERPT from now on 1 —can be important in an unstable monetary environment in which nominal shocks fuel both exchange rate depreciation and high inflation.
Apr 24, 2019 Does Fiscal Policy Credibility Matter for the Exchange Rate Pass-Through to Consumer Price Inflation in South Africa? Authors; Authors and
A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in the early 1980s, see Bernanke (2004). We will argue that the new monetary policy regime has enabled South Africa to participate in these global trends, despite major exchange rate shocks. The outline of the paper is as follows. In Section 2, we review the design and operational framework of monetary policy. The pass-through of exchange rates to inflation was much higher in Mexico than in Canada, Australia, or New Zealand. And this has to do a lot with history, with credibility of monetary policies, and this is one of the big challenges that we Monetary Policy, Exchange Rate Flexibility, and Exchange Rate Pass-Through Michael B. Devereux its policy stance. Aron and Muelbauer (2002) were the first ones to analyse South African monetary policy using a Taylor rule setting, although they showed that the latter was not very suitable for periods dominated by exchange rate management policies and financial repression.