A Bayesian-Estimated Model of InflationTargeting in South Africa
International Monetary Fund, 2008 - Anti-inflationary policies - 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 EquitRiskP EquitRR estimated model exchange rate gap exchange rate shock exogenous effects foreign output gap forward-looking gamma HP filter inflation and inflation inflation and output inflation expectations inflation targeting framework inflation targeting regime Interest Rate pt LRX filter monetary authorities monetary policy monetary reaction function monetary transmission mechanism Nominal Exchange Rate nominal interest rate Output Gap pt output gap ygapt percentage points Phillips Curve policy rate policy response Posterior Distribution potential output priors rate RSt real exchange rate real interest rate residual captures response to shocks RR steady sample SARB sharp depreciation Short-Term Interest Rate South Africa South African economy standard deviation supply shock uncovered interest parity Year-on-Year CPIX Inflation ZGAP απ γπ πα