Title: Inflation persistence and monetary policy in South Africa: is the 3% to 6% inflation target too persistent?

Authors: Andrew Phiri

Addresses: Faculty of Economic and Management Sciences, School of Economics, North West University, South Africa

Abstract: Can the South African Reserve Bank's (SARB) substantially control inflation within their set target of 3% to 6%? We sought to investigate this phenomenon by examining multiple threshold effects in the persistence levels of quarterly aggregated inflation data collected between 2003 and 2014. To this end, we employ the three-regime threshold autoregressive (TAR) model of Hansen (2000). We favour this approach over other conventional linear econometric models as it permits us to test for varying persistency within the autoregressive (AR) components of the inflation process. Our empirical explorations reveal that the SARBs set target does indeed lie within a range in which inflation is found to be most persistent. Overall and more importantly, our results suggest that the SARB should either consider revising their set inflation target by redefining the inflation target range to accommodate higher inflation rates or the Reserve Bank should consider abandoning the inflation targeting regime altogether.

Keywords: inflation persistence; aggregate inflation; disaggregate inflation; threshold autoregressive; TAR models; inflation targets; monetary policy; emerging economies; South African Reserve Bank; SARB; South Africa; inflation control; threshold effects.

DOI: 10.1504/IJSE.2016.075909

International Journal of Sustainable Economy, 2016 Vol.8 No.2, pp.111 - 124

Received: 09 Apr 2015
Accepted: 12 Oct 2015
Published online: 12 Apr 2016 *

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