An analysis of the effectiveness of inflation targeting monetary policy framework in South Africa

Abstract

This study is premised on investigating the effectiveness of inflation targeting in South Africa. The methods of analysis include the Vector Autoregressive model (VAR), the unit root test and cointegration test. The analysis was conducted with the use of EViews version 9. The findings from the study revealed that the response of inflation is not consistent with the Taylor rule hence increases in the repo rate meant to reduce inflation actually increase the inflationary pressures in the economy. This is due to the composition of the Consumer Price Index. Housing constitutes the largest weight on the CPI hence this has an impact on how the Repo rate affects inflation. The autoregression model of inflation showed that the sum of the coefficients is less than one (0.965) showing that inflation targeting has effectively reduced the persistence of inflation in South Africa. Thus monetary framework in South Africa seems to be effective and should thus be advanced for wider economic benefit.