135 research outputs found

    A re-examination of the exchange rate overshooting hypothesis: Evidence from Zambia

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    2Dornbusch’s exchange rate overshooting hypothesis has guided monetary policy conduct for many years, despite the fact that empirical evidence on its validity is mixed. This study re-examines the validity of the overshooting hypothesis by using the autoregressive distributed lag (ARDL) procedure. Specifically, the study investigates whether the overshooting hypothesis holds for the United States dollar/Zambian kwacha (USD-ZMK) exchange rate. In addition, the study tests whether there is a long-run equilibrium relationship between the USD-ZMK exchange rate and relevant macroeconomic fundamentals. Using monthly nominal USD/ZMK exchange rates and monetary fundamentals data from January 2000 to December 2012, the study finds no evidence of exchange rate overshooting. The results also show that there is no long-run equilibrium relationship between the exchange rate and the differentials of macroeconomic fundamentals. The implication is that macroeconomic fundamentals are insignificant in determining the exchange rate fluctuations in the long run. This finding is inconsistent with the monetary model of exchange rate determination, which asserts that there is a long-run relationship between the exchange rate and macroeconomic fundamentals

    Modelling inflation in South Africa: A multivariate cointegration analysis

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    We employ an expectations augmented Phillips curve framework to investigate the link between inflation, unit labour costs, the output gap, the real exchange rate and inflation expectations. Using multivariate cointegration techniques, we find evidence consistent with mark-up behaviour of output prices over unit labour costs. Most importantly, we find that the mark-up in the South African economy is much higher than in the U.S. For South Africa we find a markup of about 30 per cent: three times as high as the 10 per cent markup found for the U.S. Keywords: imperfect competitions, wage-setting, price-setting, inflation, markup, cointegration. JEL Classification: E31, E37, E5

    Monetary policy and heterogeneous inflation expectations in South Africa

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    This paper examines the relationship between inflation and inflation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate inflation expectations of individual agents as the weighted average of lagged inflation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged inflation and the opposite is true for analysts. The results reveal that the SARB has successfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to accommodate private agents' expectations

    Learning about the term structure and optimal rules for inflation targeting

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    In this paper, we incorporate the term structure of interest rates in the New Keynesian model and analyze optimal policy under uncertainty about private sector expectations and the degree of inflation persistence. The novel result of our paper is that for large deviations of inflation from its target, the active learning policy is less activist—in the sense of responding less aggressively to the state of the economy—than a myopic policy, which ignores the learning channel. Moreover, for most initial beliefs, the incentive for active learning increases as monetary policy’s leverage over the long-term interest rate increases

    Forecasting the South African economy:A DSGE-VAR approach

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    Purpose – This paper aims to develops an estimable hybrid model that combines the micro‐founded DSGE model with the flexibility of the atheoretical VAR model. Design/methodology/approach – The model is estimated via the maximum likelihood technique based on quarterly data on real gross national product (GNP), consumption, investment and hours worked, for the South African economy, over the period of 1970:1 to 2000:4. Based on a recursive estimation using the Kalman filter algorithm, the out‐of‐sample forecasts from the hybrid model are then compared with the forecasts generated from the Classical and Bayesian variants of the VAR for the period 2001:1‐2005:4. Findings – The results indicate that, in general, the estimated hybrid‐DSGE model outperforms the classical VAR, but not the Bayesian VARs in terms of out‐of‐sample forecasting performances. Research limitations/implications – The model lacks nominal shocks and needs to be extended into a small open economy framework. Practical implications – The paper was able to show that, even though the DSGE model is outperformed by the BVAR, a microfounded theoretical DSGE model has a future in forecasting the South African economy. Originality/value – To the best of the authors' knowledge, this is the first attempt to use an estimable DSGE model to forecast the South African economy

    Forecasting the South African economy: A DSGE-VAR approach

    No full text
    Purpose – This paper aims to develops an estimable hybrid model that combines the micro‐founded DSGE model with the flexibility of the atheoretical VAR model. Design/methodology/approach – The model is estimated via the maximum likelihood technique based on quarterly data on real gross national product (GNP), consumption, investment and hours worked, for the South African economy, over the period of 1970:1 to 2000:4. Based on a recursive estimation using the Kalman filter algorithm, the out‐of‐sample forecasts from the hybrid model are then compared with the forecasts generated from the Classical and Bayesian variants of the VAR for the period 2001:1‐2005:4. Findings – The results indicate that, in general, the estimated hybrid‐DSGE model outperforms the classical VAR, but not the Bayesian VARs in terms of out‐of‐sample forecasting performances. Research limitations/implications – The model lacks nominal shocks and needs to be extended into a small open economy framework. Practical implications – The paper was able to show that, even though the DSGE model is outperformed by the BVAR, a microfounded theoretical DSGE model has a future in forecasting the South African economy. Originality/value – To the best of the authors' knowledge, this is the first attempt to use an estimable DSGE model to forecast the South African economy

    Forecasting the South African Economy: A hybrid-DSGE approach

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    Please help us populate SUNScholar with the post print version of this article. It can be e-mailed to: [email protected] En BestuurswetenskappeEkonomi

    Managing disinflation under uncertainty

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    International audienceIn this paper we analyze disinflation policy when a central bank has imperfect information about private sector inflation expectations but learns about them from economic outcomes, which are in part the result of the disinflation policy itself. The form of uncertainty is manifested as uncertainty about the effect of disinflation policy on the current output gap. This differs from other studies on learning and control in a monetary policy context e.g., Ellison 20066; Svensson and Williams, 2007) that assume uncertainty about the effects of policy actions on the economy. We derive the central bank's optimal disinflation strategy under active learning (DOP) and compare it with two limiting cases--certainty equivalence policy (CEP), or passive learning, and a Brainard-style cautionary monetary policy (CP). It turns out that under the DOP inflation stays between the levels implied by the CEP and the CP. A novel result--e.g. unlike Beck and Wieland (2002)--is that this holds irrespective of the initial level of inflation. At high levels of inherited inflation the DOP moves closer to the CEP, at low levels of inherited inflation the DOP resembles the CP
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