South Africa’s monetary policy independence: evidence from a Global New-Keynesian DSGE model

ABSTRACT

We study the response of South African monetary policy decisions to foreign monetary policy shocks. We estimate the extent of foreign monetary policy pass through by augmenting standard Taylor rules and comparing the results within the context of a Global New-Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. The general equilibrium model captures important spill-over effects that would otherwise have been ignored in a single equation set-up. The results show that the relationship between foreign monetary policy shocks and South African interest rates is complicated – South Africa does not import foreign monetary policy directly, but is still affected. Except for the US, an increase in foreign interest rates leads to a decrease in South African interest rates – highlighting the complex channels that the monetary policy authority has to monitor outside of its economy.

KEYWORDS:

• Monetary policy
• contagion
• Global New-Keynesian DSGE model

JEL CLASSIFICATION:

• C20
• C30
• E43

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Frankel, Schmukler, and Serven (2004) use Treasury bill rates as a measure of interest rates instead of the actual monetary policy rate.

² India became an inflation-targeting country in 2015.

³ The Taylor rule specification holds for all the countries in this study (see Dees et al. (2014)).

⁴ The toolbox estimates the New Keynesian equations from 1980Q2 up until 2011Q2.

⁵ Russia is excluded from the list due to a lack of data in the toolbox.

⁶ This is similar to the results obtained by Ortiz and Sturzenegger (2007).