Monetary Policy Credibility and Exchange Rate Pass-Through in South Africa

July 30, 2018

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Format: Chicago

Alain N. Kabundi, and Montfort Mlachila. Monetary Policy Credibility and Exchange Rate Pass-Through in South Africa, (USA: International Monetary Fund, 2018) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which coincides with the adoption of the inflation-targeting regime. The paper conjectures, in line with the literature, that this outcome is largely due to improved monetary policy credibility. To do this, it first documents the factors that explain monetary policy credibility. Using the standard deviation of individual inflation forecasts as a measure of monetary policy credibility, its shows that the latter is negatively affected by the level of inflation itself, monetary policy uncertainty, and a measure of the unobserved stochastic volatility of inflation. The second phase proceeds by analyzing the determinants of the pass-through using the monetary policy credibility index derived from the first phase. The paper confirms the remarkable achievement that, despite the many shocks that the economy has witnessed, the declining pass-through is indeed explained by the improving monetary policy credibility.

Subject: Banking, Exchange rate pass-through, Foreign exchange, Import prices, Inflation, Inflation targeting, Labor, Labor unions, Monetary policy, Prices

Keywords: Africa, Central bank, Credibility coefficient, Credibility index, Exchange rate, Exchange rate pass-through, Import prices, Inflation, Inflation expectation, Inflation targeting, Labor unions, Monetary policy authorities, Monetary policy credibility, Monetary policy effectiveness, Monetary policy uncertainty, South Africa, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/173
Stock No:

WPIEA20180173
ISBN:

9781484371671
ISSN:

1018-5941

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