A Bayesian-Estimated Model of InflationTargeting in South Africa
International Monetary Fund, European and Research Depts., 2008 - Inflation (Finance) - 24 pages
This paper estimates a small dynamic macroeconomic model for the South African economy with Bayesian methods. The model is tailored to assessing the impact of domestic as well as external shocks on inflation within an inflation targeting framework, by incorporating forward-looking behavior of private agents and of the monetary authority. The model is able to display important empirical features of the monetary transmission mechanism that have been found in other studies. It helps to integrate the short-term inflation outlook into a consistent medium-term framework and to design the policy response for various shocks that affect inflation.
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aggregate demand aggregate supply Appendix basis points Bayesian estimation beta captures other temporary CPIX Inflation pt demand shock deviations from control domestic output gap Dornbusch-style overshooting effects on inflation equation equilibrium real interest estimated model exchange rate gap exchange rate shock exogenous effects foreign output gap forward-looking gamma 00 sd HP filter imply inflation and inflation inflation and output inflation expectations inflation targeting framework inflation targeting regime Interest Rate pt LRX filter macroeconomic monetary authorities monetary policy monetary reaction function monetary transmission mechanism Nominal Exchange Rate nominal interest rate Output Gap pt output gap ygap Phillips Curve policy rate policy response Posterior Distribution potential output priors PRRgap real exchange rate real interest rate residual captures response to shocks risk premium RR steady sample SARB sharp depreciation Short-Term Interest Rate small open economy South Africa South African economy standard deviation supply shock target range uncovered interest parity Year-on-Year CPIX Inflation