Inflation, Money Demand, and Purchasing Power Parity in South Africa

IMF Working Papers, September 1, 1999

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There exists a stable money demand type of relationship among domestic prices, broad money, real income, and interest rates.
There is a long-run relationship among domestic prices, foreign prices, and the nominal exchange rate.
In the short run, shocks to the nominal exchange rate:
- affect domestic prices;
- have virtually no impact on real output.
In the short run, shocks to broad money:
- have a temporary impact on real output;
- then become inflationary.
Both types of shocks appear to trigger a monetary policy response, since the short-term interest rate adjusts quickly.

Nominal exchange rate shocks → change domestic prices; no significant effect on real output.
Broad money shocks → temporary real output effects → subsequent inflationary effects.
Short-term interest rate adjusts quickly in response to both exchange rate and broad money shocks.

Subject: Demand for money, Exchange rates, Foreign exchange, Monetary base, Money, Nominal effective exchange rate, Purchasing power parity
Keywords: Africa, cointegration, Demand for money, domestic price, error-correction term, Exchange rates, Inflation, inflation adjustment, inflation development, inflation differential, inflation equation, inflation expectation, inflation forecasting perspective, integrating vector, Monetary base, money demand, Nominal effective exchange rate, nominal exchange rate, nominal exchange rate movement, price level, purchasing power parity, term structure, WP

Inflation,Money Demand,and Purchasing Power Parity in South Africa - WP/99/122
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