A Bayesian-Estimated Model of Inflation Targeting in South Africa

IMF Working Papers, February 1, 2008

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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.
The model 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.

Estimation approach: Bayesian methods.
Model scope: small dynamic macroeconomic model for the South African economy.
Behavioral assumptions: forward-looking behavior of private agents and of the monetary authority.
Focus: assessing impact of domestic and external shocks on inflation within an inflation targeting framework.
Empirical performance: displays important empirical features of the monetary transmission mechanism identified in prior studies.

Integrates short-term inflation outlook into a consistent medium-term framework.
Supports design of policy responses to various shocks that affect inflation.
Captures empirical characteristics of monetary transmission relevant for South Africa.

Can be used to assess monetary policy responses under inflation targeting given domestic and external disturbances.
Useful for policy design that accounts for forward-looking expectations of agents and the monetary authority.
Facilitates linking short-term inflation projections to medium-term policy frameworks.