Abstract
This paper compares international and domestic inflation expectations and inflation credibility, and hypothesises about a possible link or disconnect between inflation expectations and inflation credibility among South Africans. No similar tests have previously been performed using South African data, and there is also a general lack of domestic and international literature on any such possible link or disconnect. While research shows that inflation expectations are taken into account by all countries targeting inflation, inflation credibility is very seldom considered. Although the hypothesis is confirmed in certain instances, it is refuted by a disconnect between the inflation expectations and inflation credibility of male and female respondents in South Africa, which cannot be explained by available data.
Highlights
This paper considers inflation expectations and inflation credibility
Their analysis is outside the scope of this paper, as the European Central Bank (ECB) is not an inflation-targeter, it reconfirms that inflation credibility can be eroded by public perceptions and that a lack of credibility can feed into inflation expectations
As surveys of inflation credibility reported of this paper focused only on households, this section reports only household inflation expectations in the fourth quarter of 2006.9 These surveys were undertaken by AC Nielsen on behalf of the Bureau for Economic Research (BER) as part of a broader research survey
Summary
This paper considers inflation expectations (a focus on future inflation) and inflation credibility (a focus on historical inflation). By means of a multinomial model, it tests whether there is a link or a disconnect between inflation expectations and inflation credibility among South Africans This is the first comparison of this nature using South African data. The analysis and argument are developed as follows: Section 2 commences with a comparative literature review of inflation expectations and inflation credibility in inflationtargeting countries. Fracasso et al (2003) and the Bank of Iceland (2003) considered various aspects of the monetary policy reports (known, for instance, as Inflation Reports, Monetary Bulletins or Monetary Policy Reviews) of the central banks of 21 countries identified at the time as inflation targeters, and assessed the reports of 20 of these central banks.. 2005; Ehrmann & Fratzscher, 2005), omits any reference to inflation expectation or inflation credibility surveys
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