{
  "title": "Macroeconomic Effects of Lowering South Africa’s Inflation Target",
  "publication": "IMF Working Papers, November 7, 2025",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2025/11/07/macroeconomic-effects-of-lowering-south-africas-inflation-target-571701",
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  "summary": "This paper explores the macroeconomic implications of lowering the inflation target in an Emerging Market such as South Africa using the IMF’s Global Integrated Monetary and Fiscal model (GIMF). Model-based simulations indicate that lowering the inflation target from 4.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Uses the IMF’s Global Integrated Monetary and Fiscal model (GIMF) to explore macroeconomic implications of lowering the inflation target in an Emerging Market such as South Africa.\n- Model-based simulations indicate that lowering the inflation target from 4.5 to 3 percent may entail moderate near-term output costs (measured by the so-called “sacrifice ratio”), while leading to medium-term output gains and lower borrowing costs.\n- Near-term costs critically depend on the credibility of the central bank, which determines the speed with which agents adjust their inflation expectations."
    },
    {
      "heading": "Model and Scenarios",
      "content": "- Model: Global Integrated Monetary and Fiscal model (GIMF).\n- Policy experiment: Announcement and implementation of a lower inflation target, from 4.5 to 3 percent.\n- Key mechanism examined: speed of adjustment of inflation expectations following the announcement and sensitivity of risk premia to the announcement."
    },
    {
      "heading": "Main Findings",
      "content": "- Lowering the inflation target from 4.5 to 3 percent:\n  - May entail moderate near-term output costs, measured by the “sacrifice ratio”.\n  - Can produce medium-term output gains.\n  - Can lead to lower borrowing costs over time.\n- Credibility effects:\n  - Output costs are lower when inflation expectations adjust more rapidly following the announcement of the new target by the central bank.\n- Risk premia effects:\n  - Higher sensitivity of risk premia to the announcement of a lower inflation target can further reduce near-term output costs."
    },
    {
      "heading": "Policy Implications and Recommendations",
      "content": "- Strengthen central bank credibility to speed adjustment of inflation expectations and reduce near-term output costs.\n- Recognize that reductions in risk premia associated with a credible lower inflation target can lessen the sacrifice ratio.\n- Concurrent fiscal consolidation can:\n  - Help support the disinflation process.\n  - Lower the marginal sacrifice ratio.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2025/11/07/macroeconomic-effects-of-lowering-south-africas-inflation-target-571701"
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    "Authors: . Jana Bricco, Mario Mansilla, Delia Velculescu, Philippe Wingender",
    "Published: November 7, 2025",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798229031141.001",
    "Uses the IMF’s Global Integrated Monetary and Fiscal model (GIMF) to explore macroeconomic implications of lowering the inflation target in an Emerging Market such as South Africa.",
    "Model-based simulations indicate that lowering the inflation target from 4.5 to 3 percent may entail moderate near-term output costs (measured by the so-called “sacrifice ratio”), while leading to medium-term output gains and lower borrowing costs.",
    "Near-term costs critically depend on the credibility of the central bank, which determines the speed with which agents adjust their inflation expectations.",
    "Model: Global Integrated Monetary and Fiscal model (GIMF).",
    "Policy experiment: Announcement and implementation of a lower inflation target, from 4.5 to 3 percent.",
    "Key mechanism examined: speed of adjustment of inflation expectations following the announcement and sensitivity of risk premia to the announcement.",
    "Lowering the inflation target from 4.5 to 3 percent:",
    "Credibility effects:",
    "Risk premia effects:",
    "Strengthen central bank credibility to speed adjustment of inflation expectations and reduce near-term output costs.",
    "Recognize that reductions in risk premia associated with a credible lower inflation target can lessen the sacrifice ratio.",
    "Concurrent fiscal consolidation can:",
    "**Working Paper**"
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