n African Finance Journal - Forward-looking monetary policy reaction functions for South Africa

Special issue 1
  • ISSN : 1605-9786



This paper analyses the interest-rate decision-making behaviour of the South African Reserve Bank (SARB) since the of the adoption of the Inflation Targeting Monetary Policy Framework (ITMPF). The general method of moments (GMM) technique is used to model hybrid Taylor type rules, employing monthly revised data from the period January 2000 to February 2008. This study successfully demonstrates that policy responses are best described by a closed-economy reaction function that incorporates twelve months ahead-expected inflation together with the output gap. However, an open economy specification that includes deviations of real effective exchange rates from its reference value also gives plausible results.

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