An Evaluation of How the Inflation Targeting Framework Has Performed in South Africa

Abstract

How has the inflation targeting framework performed in South Africa? This chapter evaluated the performance of the inflation targeting framework in South Africa from several perspectives. Insight from the inflation and output-gap trade-off indicates that the Taylor curve shifted inwards between 2000Q1 and 2007Q2 as lower inflation volatility for any given level of output volatility was achieved. Furthermore, evidence shows that the South African Reserve Bank seems to have reasonably adjusted policy settings in response to the deviation of inflation from target and the deviation of output from potential in balanced way. These findings are aligned to what the flexible inflation targeting framework is about. Insight from the relationship between output growth, output-gap and inflation show that the Phillips curve has become flatter post-2009. The relationship between the output-gap and inflation has been rather weak and slightly negative post-2009. These trends mean that the period post-2009 has been characterised by the simultaneous occurrence of a negative and widening output-gap and inflation deviations from the target band.

Furthermore, within the debate about the appropriateness of the current 3 to 6 per cent inflation target range, evidence shows that there are thresholds within the current inflation target band where policymakers can exploit the inflation-output trade-off to their advantage. These inflation thresholds lie between 2 and 4 per cent. In addition, evidence shows that various measures of the credibility of monetary policy conduct indicate that monetary policy has become more credible during the inflation targeting period, especially post-2009. This is because the deviation of the inflation outcomes relative to the inflation target has been minimum, especially post-2009. Thus, evidence presented in this chapter indicates that the inflation targeting framework has performed fairly well and the macroeconomic performance has been robust under the inflation targeting framework, especially in periods during which inflation has been between 2 and 4 per cent.