Estimating monetary policy rules for South Africa

Abstract

South African monetary policy has experienced major shifts, with three broad monetary policy regimes since the 1960s. This paper analyses the conduct of monetary policy, describing the historical record and institutions of monetary policy, and formally modelling extended Taylor rules for interest rate policy formation. Our principal interest is in the second regime (prior to inflation targeting), when the short-term interest rate first became the main monetary policy instrument, with reference to monetary targets and an eclectic set of economic indicators. Policy was opaque in the regime, and has never been studied in the context of rigorous empirical models. We estimate the weights applied to different objectives in the interest rate rule, quarterly from 1986-97, using our own inflation and output gap forecasts to 1998. Taylor rules, augmented for foreign interest rate influences and interest rate smoothing, and based either on forecast, or actual, inflation and output gap...