Estimating the Implicit Inflation Target of the South African Reserve Bank

IMF Working Papers, July 1, 2012

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Canonical URL: Estimating the Implicit Inflation Target of the South African Reserve Bank

This paper applies a state-space approach to estimate the implicit inflation target of the South African Reserve Bank (SARB) since the adoption of the Inflation Targeting (IT) framework.
The paper's findings are two:
- First, although the official inflation target range is 3.6 percent, in practice, the SARB seems to have aimed for the upper segment of the band (41.2 .6 percent) for most of the period, despite the substantial variation of the output gap.
- Second, the estimation results show that the implicit inflation target varied over time, and in recent years it has shifted toward the upper limit of the inflation target range.
The paper suggests that since the outbreak of the financial crisis in 2008, the SARB's tolerance for higher inflation has somewhat increased to better support economic activity.

Estimation approach: state-space models
Techniques noted: Kalman filter
Modeling context: inflation targeting framework, reaction function, Taylor rule, output gap stabilization

Implicit inflation target behavior:
- Official inflation target range reported as 3.6 percent.
- In practice, SARB appears to have aimed for the upper segment of the band (41.2 .6 percent) for most of the period.
- The implicit inflation target varied over time and shifted toward the upper limit in recent years covered.
Policy interpretation:
- Post-2008 financial crisis period characterized by a possibly higher tolerance for inflation to support economic activity.
Interaction with real economy:
- Observed behavior occurred despite substantial variation of the output gap.

Central bank policy rate and inflation targeting behavior under differing output gap conditions.
Trade-offs implied between inflation stabilization and support for economic activity, especially following the 2008 financial crisis.
Relevance for monetary policy frameworks and the calibration of implicit targets within announced target ranges.

Subject: Central bank policy rate, Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production
Keywords: Africa, Central bank policy rate, computed output gap, Global, Inflation, inflation expectation, inflation target framework, inflation target range, Inflation targeting, Kalman filter, Monetary policy, Output gap, output gap stabilization, reaction function, real rate, state space models, Taylor rule, WP