Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/190092 
Year of Publication: 
2018
Series/Report no.: 
WIDER Working Paper No. 2018/43
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
This paper investigates whether a Taylor rule accurately describes the South African Reserve Bank's reaction function in setting interest rates using quarterly data, covering the period since inflation targeting was formally adopted in 2000. The classic Taylor rule is modified to determine whether the South African Reserve Bank takes into account inflation expectations and labour market conditions. Our findings indicate that a modified Taylor rule does describe the South African Reserve Bank's policy rate adjustments. Our estimates of the modified rule yield two significant findings: the South African Reserve Bank's policy rate decisions respond to expected inflation (rather than current inflation), and its relationship to real economy fluctuations is evident in measures of labour market conditions rather than output gap variables. We conclude that under inflation targeting, South Africa's monetary policy has had a forward-looking inflation target that is pursued flexibly in the light of labour market conditions.
Subjects: 
employment
labour
monetary policy
output gap
South Africa
Taylor rule
unemployment gap
JEL: 
E43
E52
E58
J69
Persistent Identifier of the first edition: 
ISBN: 
978-92-9256-485-8
Document Type: 
Working Paper

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