The impact of a change in monetary policy by means of a monetary macro-econometric model
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Date
2001
Authors
De Jager, Shaun
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
Monetary policy essentially reflects monetary theory. As the financial system is complex
and intricate in nature, it becomes virtually impossible to conceive without a theory to
simplify its structure. This simplified structure should ideally be geared towards the
generation of a transparent financial environment in order to enhance the effectiveness of
monetary policy initiatives. To this end, a new monetary policy framework was adopted by
the SARB in the year 2000, and is based on achieving a pre-determined inflation target over
a specific period of time. The mission of the SARB to protect the value of the domestic
currency hence remains the primary objective of the monetary authorities, and any
assistance in increasing the transparency of the Bank's monetary policy initiatives will no
doubt increase the overall effectiveness of monetary policy.
Inflation basically remains a monetary phenomenon and the rates of growth in domestic
money supply and bank credit extension are important factors in the new inflation targeting
environment. Accordingly, the Bank's actions are aimed at adjusting the repo rate to
influence economic expansion and the demand for credit. It is essentially for this purpose
that the monetary macro-econometric model has been estimated in this study, and
furthermore to elucidate the links between the financial and real sectors of the economy.
The model has been structured to reflect money demand theory and how the various domestic economic agents interactively react to a monetary policy impulse. Various
alternative monetary policy simulations were performed on the model to determine if the
model was robust, and whether it suitably reflected the intricate links between the various
key sectors of the economy. The results of the model suggested that it was stable and
suitable for policy simulation purposes, and that the monetary transmission mechanism in
South Africa is fairly long. In addition, it was found that there was a close relationship
between real economic activity and inflation, while the lagged impact on real output growth
from a hypothetical change in interest rates was approximately one year. The primary objective of the newly adopted inflation targeting framework is to achieve price
and financial market stability over the long-term. As this framework is of a forward-looking
nature, it becomes imperative to realise that monetary policy initiatives taken now, will result
in (or influence) the possible outcome of the future. This process will even more importantly
determine whether the SARB will achieve its inflation target or not. However, the sole
purpose of this study was to develop a model that suitably illustrates the key links in the
transmission mechanism, and not specifically to determine a model geared towards
forecasting the future rate of inflation.
The structure and theoretical foundation of the model is not a guarantee for successful
monetary policy implementation, but its importance in illustrating the links between the key
sectors of the economy cannot be denied. This characteristic makes the model a useful tool
in the wide arsenal of operational instruments at the Bank's disposal, and in the process
induces an environment in which the monetary policy implementation process becomes
more transparent. Afterall, it is the credibility and transparency of the monetary authority
that enhances the various stake holders ability to interpret the signalling intentions of the
central bank, and it is this that ultimately determines the effectiveness of monetary policy.
Description
Dissertation (M.Com. (Economics))--University of the Free State, 2001
Keywords
Monetary policy -- Decision making, Fiscal policy -- South Africa