Abstract
Inflation targeting is increasingly seen as a crucial monetary policy by many economies in their quest for economic growth. The choice of an appropriate exchange rate regime, continue to be crucial in macroeconomic policy. Using data from 1970q1 to 2015q4, the paper examines the effects of inflation targeting on exchange rate pass-through. Applying a VAR model, the results show that inflation targeting has significant impacts on the movements of inflation, output and the exchange rate. The pass-through to consumer prices decreased and there was a reduction in the influence of foreign producer costs on imports prices after adopting inflation targeting.
Highlights
This paper examines the effects of inflation targeting on exchange rate pass-through in South Africa
This paper researched the impact of inflation targeting on exchange rate pass-through to domestic prices in South Africa using quarterly data from 1970q1 to 2015q4
Applying a vector autoregressive (VAR) model, the results show that inflation targeting has significant impacts on the movements of inflation, output and the exchange rate
Summary
This paper examines the effects of inflation targeting on exchange rate pass-through in South Africa. For a small open economy like South Africa, exchange rate movements are more significant than in advanced industrialized countries as they are likely to have a proportionally greater effect on prices, price competitiveness, resource allocation and output. The experience of South Africa can offer valuable lessons to other African countries and small open economies in evaluating the potential costs versus benefits of IT as they consider the inclusion of more liberal trade policies in their economic growth and development plans. Following this introduction, the paper has five other sections.
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