Monetary Policy and Relative Price Shocks in South Africa and Other Inflation Targeters
IMF Working Papers, December 1, 2008
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- Monetary Policy and Relative Price Shocks in South Africa and Other Inflation Targeters
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Bibliographic details
- Authors: Alfredo Cuevas, Secil Topak
- Published: December 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451871470.001
Summary
- When faced with a relative price shock, monetary authorities often aim to contain its second round effects on inflation while accepting first round effects.
- The paper analyzes the experience of South Africa and other inflation targeters to explore whether and when this policy prescription implies changing the monetary policy stance.
- An examination of individual policy decisions highlights the importance of the broader economic context in framing responses to relative price shocks.
Findings and analysis
- Inflation targeting central banks differ on how aggressively they typically react to relative price shocks, reflecting differences in resilience of underlying inflation to such shocks.
- The study compares South Africa with other inflation targeters to assess variability in policy responses.
- Individual policy decisions demonstrate that the broader economic context influences whether authorities change monetary policy stance in response to relative price shocks.
Policy implications and recommendations
- Contain second round inflation effects from relative price shocks while tolerating first round effects, unless the broader economic context warrants a change in monetary policy stance.
- Tailor the aggressiveness of the monetary policy response to the assessed resilience of underlying inflation to such shocks.