Thesis (LL.M.)

Thesis (PhD)--Stellenbosch University, 2011. / ENGLISH ABSTRACT: The effectiveness of monetary policy depends importantly on the expectations of the private sector, as it is largely through this channel of the transmission mechanism that policy changes are transmitted to long-term interest rates. This has increased the emphasis on the role of central bank communication as a monetary policy tool. Successful communication is essential both to enhance the effectiveness of monetary policy and to build support for the institutional framework within which monetary policy is implemented. While the large and growing literature on central bank communication over the past decade has delivered strong support for the important role of central bank communication, there is less agreement about what the optimal communication strategy is. Furthermore, research has been limited mainly to studies of communication between central banks and the financial markets. In an evaluation of progress in the literature, Blinder et al. (2008) highlight the need to examine the interaction between central banks and the rest of the private sector (the general public) as well. The objective of this PhD dissertation is to evaluate the South African Reserve Bank’s (SARB’s) use of communication as a monetary policy tool. Special focus is given to communication with the inattentive general public, who set prices in the labour market and the market for goods and services. Different aspects of the SARB’s communication were studied, including the consistency of the South African Reserve Bank’s communication, the transmission of this communication via the media to the general public, and the process by which the general public gathers and processes the information on inflation. An evaluation of the SARB’s communications (its original messages) provided some evidence that the SARB has succeeded in communicating consistently over the inflation targeting period. This was followed by an assessment of the role of the media in transmitting the original communications to the general public. The results suggest that South African media reports generally show a lack of critical assessment of monetary policy decisions and that the inter-meeting communication by the SARB is ineffective at influencing these. An important challenge is for the SARB to consider how it can participate more actively in the economic discussion at this level and how it can build productive strategic relationships with the media. The final section of this dissertation explores the process by which the general public forms its inflation expectations, relying on epidemiological models to describe the spread of inflation information and to estimate the speed at which the general public, in aggregate, updates their inflation expectations. This estimate of the speed of adjustment will be valuable to future research that aims to build a Phillips curve in a new way for South Africa. A well-modelled Phillips curve will both improve the monitoring of the impact of monetary policy and inform future policy design and implementation. / AFRIKAANSE OPSOMMING: Die doeltreffendheid van die monetêre beleid is beduidend afhanklik van die verwagtinge in die privaat sektor, aangesien beleid hoofsaaklik deur hierdie kanaal langtermyn rentekoerse beïnvloed. Hierdie bewustheid het die klem op die rol van sentrale bank kommunikasie as ‘n monetêre instrument versterk. Suksesvolle kommunikasie is noodsaaklik om beide die effektiwiteit van monetêre beleid te verseker sowel as om ondersteuning vir die institusionele raamwerk waarbinne die monetêre beleid geïmplimenteer word, te bou. Hoewel daar ‘n groot en groeiende literatuur is wat die belangrikheid van sentrale bank kommunikasie oor die afgelope dekade beklemtoon, is daar nie eenstemmigheid oor wat die optimale kommunikasie strategie behels nie. Daarbenewens is meeste studies beperk tot die kommunikasie tussen monetêre owerhede en die finansiële sektor. In ‘n evaluering van die literatuur het Blinder et al. (2008) die noodsaaklikheid beklemtoon om die wisselwerking tussen monetêre owerhede en die res van die privaat sektor (die publiek) te bestudeer. Die doel van hierdie proefskrif is om die Suid-Afrikaanse Reserwebank (SARB) se gebruik van hierdie kommunikasie instrument te evalueer. Spesiale aandag word geskenk aan kommunikasie met die onoplettende publiek wat pryse bepaal in die arbeidsmark en markte vir goedere en dienste. Verskillende aspekte van die SARB se kommunikasie strategie word bestudeer, insluitende die konsekwentheid van kommunikasie, die oordrag van hierdie kommunikasie via die media aan die publiek, asook die proses waarmee die publiek informasie rakende inflasie versamel en verwerk. ‘n Evaluering van die SARB se kommunikasie (die oorspronklike boodskappe) lewer bewys dat die SARB daarin geslaag het om konsekwent te kommunikeer tydens die inflasie teikeningsperiode. Dit word gevolg deur ‘n evaluering van die rol van die media om oorspronklike informasie suskesvol aan die publiek oor te dra. Die resultate dui daarop dat berigte in die Suid Afrikaanse media oor die algemeen aan kritiese evaluering van die monet.re beleidsbesluite ontbreek en die SARB se kommunikasie tussen monetêre beleidsvergaderings is ook oneffektief gevind. ‘n Belangrike uitdaging vir die SARB is dus om te bepaal hoe dit op hierdie vlak tot die ekonomiese debat kan toetree en hoe dit produktiewe strategiese verhoudings met die media kan bou. Die laaste afdeling van die proefskrif bestudeer die proses waarvolgens die publiek hul inflasieverwagtinge formuleer deur gebruik te maak van epidemiologiese modelle wat die verspreiding van inflasie verwagtinge, asook die spoed waarteen die publiek oor die algemeen hul inflasieverwagtinge opdateer, beskryf. Die snelheid waarmee die publiek hul verwagtinge opdateer behoort veral van waarde te wees vir toekomstige studies wat poog om ‘n Phillips kurwe met ‘n nuwe aanslag vir Suid Afrika te skort. ‘n Goed geformuleerde Phillips kurwe sal monitering van monetêre beleide se impak verbeter, en sal ook as ‘n goeie riglyn vir toekomstige beleidsontwerp en -implimentering dien.

The control of inflation requires a forecast of the future path of the price level and its indicators. Targeting inflation directly requires that the central bank (SARB) form forecasts of the likely path of prices paying close attention to a variety of indicators that shows the predictive power of inflation in the past periods. Inflation indicators might be cointegrated with the rate of inflation to predict the future inflation rates. Forecasting inflation may be very difficult at a particular period due to the fact that the array candidate indicators of inflation may neither be very stable nor very strong in their relationships with the rate of inflation. Although this might be the case, this research uses testable effects of each of the South African inflation indicators to the rate of inflation using econometrics tools to find that they have a long run trend with the rate of inflation in South Africa. It has been found that each of the indicator variables has a long run relationship with the rate of inflation. The major conclusion is that inflation indicator variables like money supply (M3), oil price, gold price, total employment, interest rates, exchange rates and output growth can be useful inflation indicators in targeting the future trends of inflation in South Africa according to the data used in this research although some studies in some countries find that inflation targeting is an insufficient framework for monetary policy in the presence of financial exuberance. The money supply, the oil prices, interest rates, the exchange rates, prices of gold, the employment and output growth are co-integrated with the rate of inflation representing a long-run relationship.

South Africa introduced inflation targeting as a monetary policy framework in 2000. This marked a sizable shift in monetary policy management from the previous "eclectic" approach and the explicit focus on M3 money supply before that. The study appraises the effectiveness of monetary policy under this new dispensation. However, the analysis does not centre on inflation outcomes, which can be a measure of effectiveness because they are the overriding objective of the South African Reserve Bank in effect, it is possible to have a target-friendly inflation rate for a length of time despite monetary policy that is ambiguous and encourages unpredictability in market interest rates. However, persistent policy opaqueness can, over time, damage a favourable inflation scenario. For instance, if the public is unsure about the Reserve Bank's desired inflation target, price setting in the wage and goods markets may eventually produce an inflation outcome that is higher than the Bank may have intended. Rather, this study adjudicates the effectiveness of monetary policy within the context of policy transparency, which is an intrinsic part of the inflation targeting framework. The study looks at the extent to which monetary policy transparency has enhanced both the anticipatory nature of the market's response to policy actions and the force that policy has on all interest rates in the financial system, particularly long-term rates. These concepts are important because through the transmission mechanism of monetary policy, the more deft market participants are at anticipating future Reserve Bank policy the greater the Bank's ability to steady the economy before the actual policy event. With the aid of regression models to estimate the response of market rates to policy changes, the results show that there is significant movement in market rates in anticipation of policy action, rather than on the day of the event or the day after. Indeed, the estimates for market rates movement on the day of and even the day after the policy action are generally minute. For instance, the R157 long-term government bond yield changes by a significant 41 basis points in response to a one percentage point change in the Reserve Bank's benchmark repo rate in the period between the last policy action and the day preceding the current action. In contrast, the R157 bond yield changes by an insignificant 2 basis points on the day of the current repo rate change and about 1 basis point the day after the current change. The results point to a robust relationship between policy transparency and the market's ability to foresee rate action. If this were not the case, it is likely that there would be persistent market surprise and, hence, noticeable movement in interest rates on the day of the rate action and perhaps even the day after. Another important observation is that monetary policy impacts significantly on both short- and long-term market rates. Again, certifying the robustness of monetary policy under the inflation targeting regime

Thesis (LL.M.)

A voluminous literature attempts to explain the various channels of the monetary policy transmission mechanism through which central banks ultimately achieve price stability. However, most research focuses on interest rate pass-through and the demand for money phase, while there is limited research on the demand for credit. This study endeavours to contribute to the understanding of this neglected phase of monetary policy transmission by exploring the response of the real demand for bank credit by the private sector to changes in the real prime rate from 1990:1 to 2004:4 in South Africa. Firstly, the behaviour of the real prime rate in relation to the repo rate is explored using graphical analysis. The study observes that an increase in the repo rate causes an increase in the real prime rate, such that there is always a margin of three or four percentage points between the two rates. Secondly, using secondary data, the Johansen methodology is used to determine the relationship between the demand for bank credit and its determinants (GDP, inflation, real prime rate and real yield on government bonds). Two co-integrating relationships are found. The Gaussian errors from one co-integrating vector are used to model the Vector Error Correction Model, which provides the short-run dynamics and the long-run results, through the use of Eviews 5 software. The results of the study show that while all other variables are negatively related to the demand for bank credit in the long-run, GDP has a positive influence. In the short-run, yield on government bonds and inflation coefficients depict a positive association, while the coefficients of real prime rate and GDP are negative. The error correction coefficient is -0.32, which implies that a 32% adjustment to equilibrium happens in the demand for bank credit in a quarter and that the complete adjustment takes about three quarters to complete. Thirdly, the generalised impulse responses results indicate that the impact on the real prime rate affects the demand for bank credit from the first quarter. The study concludes that the real prime rate has a negative impact on the demand for credit both in the short-run and long-run.

Money Service Businesses provide people and institutions with a way to send money (remit) from one place to another. This service is most often associated with migrants, who typically wish to send money or value home. Remittances can be sent both on a domestic and on a cross-border basis. The methods used to remit money or value can be used for both legitimate and illegal purposes. The question posed by this research is whether the Money Service Businesses that operate in South Africa and provide crossborder remittance services are adequately regulated, to ensure that it is not used for the purposes of money laundering and/or terror financing. Copyright / Dissertation (MPhil)--University of Pretoria, 2010. / Accounting / unrestricted

Thesis (MBA)--Stellenbosch University, 2002. / ENGLISH ABSTRACT: Payment systems can be defined as a funds transfer system processing third party payments, supervised by a central bank or appropriate Regulatory Authority. (S.W.I.F.T., 1997). Therefore the importance of a well managed system, through regulatory methods, as well as self-regulation by the industry, cannot be over emphasized. According to Humphrey, (1996: 923), the composition of non-cash transactions consists of the following five payment instruments. The paper-based transactions are composed of cheques and paperbased giros payments. The electronic transactions consist of electronic giro, debit card (POS), and credit card payments. According to Vives, (1998: 168) there are normally two goals when a country wants to change its payment system, either it wants to increase efficiency, or it wants to reduce risk. If there is a conflict between risk and efficiency, the less risky solution must prevail. Credit risk and systemic risk poses the greatest challenges to payment systems. Credit risk exists when credit was granted to a participating member, which cannot fulfil its debt at the stage of payment need to be made. Systematic risks encompass situations in which the credit or liquidity problems for one or more market participants create substantial credit or liquidity problems for participants elsewhere in the financial system. (Emmons, 1997: 11). In order to create international standards in addressing the risk issues involved the Bank of International Settlements was established. The Bank's predominant tasks are to promote the co-operation of central banks and to provide additional facilities for international financial operations, and to create and maintain stability of international monetary and financial systems. The Bank of International Settlements published the Lamfallussy report. From the findings of this report a series of policy recommendations regarding netting schemes. The Basle Committee was established by the Central Bank Governors of the Group of Ten countries as a result of serious failures and disturbances in the international currency and banking markets, with the main objective to improve the collaboration between bank supervisors world wide. The objective is met by using three different methods, namely. Exchange information on national supervisory arrangements, improving the effectiveness of techniques for supervising, and the setting of minimum supervisory guidelines and recommendations and recommended statements of best practices, expecting authorities to take steps to implement in their respective countries. To enable secure international payments the Society for Worldwide Inter-bank Financial Telecommunications (SWIFT) was created, with the mission to provide technology-based communication services across all financial markets through member banks and their market infrastructures so that they can meet their own and their end-customers' needs. There is a growing awareness among central banks of the need to ensure the integrity, the security and the stability of their country's payment system. The central bank's main function was to regulate the country's currency circulation, to facilitate' payment transactions and to pursue a credit and monetary policy serving the interest of the country as a whole. Because of their importance for the smooth operation of commerce of financial markets, central banks often own and/or operate large value payment networks themselves rather than leave this function solely to commercial banks. (Sato et a/., 1995: 37). Commercial banks, or their agents, perform the vast majority of the clearing and processing of payment in developed countries, as well as providing the payment facilities to clients. The United States central bank is the main exception to this division of responsibility as it provides settlement service as well as check processing and over one-half of all Automatic Clearing Houses and wire processing services. (Sato et a/., 1995: 32). The re-entry of South Africa in the global trade in the early 1990s created new opportunities and challenges for the country. With the existing established payment system, South Africa provides a gateway to the Southern African countries. There are a number of fundamental changes in the financial markets, which have an impact on payment and settlement systems. The first important factor is the high speed of technological progress. Secondly, the fundamental change in financial markets concerns the internationalisation of financial flows. From a central bank point of view, these developments, although in principle to be welcomed because of their contribution to the effect of allocation of financial resources, require close attention, as the interrelationships between worldwide financial markets could also give rise to a propagation of risks. (Koning, 1998: 19). South Africa's payments system, as a well-functioning system, compares favourably with the best in the world; this is an essential requirement for participation in the international finance and trading. The challenge the South African banks face is the social responsibility to uplift the community on the one side, and compliance with the international rules and legislation on the other. In accordance to the minimum requirements set by the Lamfallussy report. The Reserve Bank of South Africa enforced strong policies via the Banking Council of South Africa, as well as the different committees and associations dedicated to certain payment systems. The South African Reserve Bank intent to provide an Electronic Communications and Transactions Bill in order to promote and regulate electronic communication and transactions. The Banking Council set certain criteria that will be implemented from the first of January 2002 on the item limits applicable to the certain electronic methods of payment. Councils and associations in the banking sector are established, self-regulatory as well as government controlled, to enforce rules and regulations to reduce the risk involved in the industry and comply with international requirements. A strong legal framework and the enforcement of certain risk prevention methods, for instance the enforcement of item limits and the change in the law on the crossing of cheques prove the commitment to participate internationally. The strong movement to same day settlement, (especially in high value payments via the SAMOS system), show that the payment industry in South Africa is on an ongoing process of implementing new procedures to comply with the international standards. Electronic money can be defined as stored value or prepaid products in which a record of funds or value available to the consumer is stored on a device in the consumer's possession. (Bank of International Settlements, 2001: 1). Consumers benefit from the ability to use payment methods that are inexpensive, convenient, and accessible. (Bank of International Settlements, 1997: 6). The participation in the payment processes by non-financial entities, coupled with the design and widespread use of unknown digital form of monetary value poses serious threats to the central bank's ability to control monetary policy and safeguard financial stability. Card based e-money schemes have been combined with functionality's such as access control, holder identification or local transportation ticketing. Network-based e-money schemes are operational or under trail in a limited number of countries. The existing payment system legislation applies to networkbased schemes. The South African Reserve Bank needs to constantly monitor and analyse the existing and new different methods of payment systems in order to create a low risk, stable, safe and a trade supportive environment for the improvement of its own economy, as well as for the Southern African region. Specific attention needs to be given to the high-value payment systems in order to reduce systemic risk. The prevalent factor is the real time settlement of the SAM OS (South African Multi Option Settlement) system. Finally, regulators need to coordinate actions, through the international and local platforms provides, to implant financial discipline, manage risk and support cross-border and regional trade. / AFRIKAANSE OPSOMMING: Betaalstelsels kan gedefinieer word as 'n opdragte- of fondsoorplasingstelsel vir die maak van betalings aan 'n derde party, wat gereguleer word deur 'n sentrale bank of regering. (SWIFT, 1997). Die belangrikheid van 'n goedgereguleerde stelsel, deur middel van wetgewing, sowel as selfregulering deur die industrie, kan nie oorbeklemtoon word nie. Humphry (1996: 923) beskryf die samestelling van nie-kontant betaalstelsels as die volgende vyf instrumente. Die papier gebaseerde transaksie wat uit tjeks, papier-gebaseerde "giro' bestaan. Elektroniese transaksies bestaan uit die elektroniese "giro", debiet- en kredietkaarte. Volgens Vives (1998: 168) is daar normaalweg twee doelwitte wanneer verandering aan 'n betaalstelsels aangebring word, naamlik die verbetering in doeltreffendheid, of die vermindering van risiko, waar die laer risiko gewoonlik die voorkeur sal kry. Kredietrisiko en sistemiese risiko hou die grootste uitdagings vir betaalstelsels in. Kredietrisiko ontstaan waar krediet aan 'n deelnemende lid van 'n stelsel verleen word en die ander party nie kan presteer op die tydstip van betaling nie. Sistemiese risko's sluit situasies in waar krediet of likiditeit probleme vir een of meerdere deelnemers vir ander deelnemers groot krediet of likiditeits probleme skep in die finansiële stelsel. (Emmons, 1997: 11). Om risiko's internasionaal aan te spreek is die Bank of International Settlements gestig. Die organisasie het ten doeI om koördinasie tussen die sentrale banke te bevorder en stabiliteit te skep in die internasionale monetêre en finansiële markte. Die Bank of International Settlements het die Lamfallussy verslag opgestel waarin verskeie beleid aanbevelings aangaande verrekeningstelsels gemaak word. Die Basle Committee is gestig deur die hoofde van die Groep van 10 lande se sentrale banke weens die mislukking en ontwrigting van geldeenhede en finansiële markte wêreldwyd, met die doelstelling om samewerking tussen banke wêreldwyd te bevorder. Dit word bereik deur drie metodes naamlik, uitruil van inligting wêreldwyd na adviseurs, verbetering in die verskaffing van advies en die daarstel van riglyne en aanbevelings aangaande die beste praktyke, wat regerings in hul eie lande kan aanwend. Vir die daarstelling van 'n gestandaardiseerde, veilige intenasionale opdragte en betalings stelsel is die Society for Worldwide Inter-bank Financial Telecommunications (SWIFT) gestig, met die missie om 'n tegnologie gebasseerde opdrag en kommunikasie stelsel daar te stel wat alle markte deur middel van lede lande en hul infrastrukture kliënte kan bedien. Daar is 'n toenemende bewuswording onder sentrale banke om die integriteit en die sekuriteit van hul eie betaalstelsel te verseker. Die hoof funksie van die sentrale bank is die regulering van die land se geldeenheid, om betalings moontlik te maak en die daarstel van krediet- en monetêre beleid vir die steun van die land se belange as geheel. Weens die belangrikheid in die suksesvolle werking van die kommersiële markte, besit sentrale banke groot gedeeltes van die verrekeningstelsels eerder om dit aan kommersiële banke oor te laat. (Sato et aI., 1995: 37). Elke sentrale bank verskaf verskillende verrekeningsdienste afhangende van faktore soos die verskillende regsfaktore, sosiale faktore, politieke faktore, internasionale- en mededingende faktore. Kommersiële banke, of hul agente, is verantwoordelik vir die oorgrootte van verwerkingsaksies in ontwikkelende lande, asook die verskaffing van die betalingsmiddele. Die Verenigde State se sentrale bank is die hoof uitsondering wat self die verrekeningsdienste lewer, die prosessering van tjeks doen, die verrekeningshuise besit en verwerking dienste lewer. (Sato et al., 1995: 32). Suid-Afrika se hertoetrede tot die internasionale finansiële wêreld in die vroeë jare negentig het geleenthede en uitdagings meegebring. Met 'n bestaande gevestigde betaalstelsel word Suid-Afrika beskou as die deur na die Suider- Afrikaanse lande. Verskeie fundamentele veranderinge in die finansiële markte het 'n impak op die betaal- en verrekeningstelsels. Eerstens die spoed van tegnologiese vooruitgang; tweedens die verandering van die finansiële markte in terme van kapitaalvloei. Uit die oogpunt van 'n sentrale bank, verg die toekenning van finansiële hulpbronne, intense aandag, omdat die interverwantskappe van finansiële markte wêreldwyd risiko's verhoog. (Koning, 1998: 19). Suid-Afrika beskik oor 'n goed funksionerende betaalstelsel wat vergelyk kan word met die bestes ter wêreld en is van uiterste belang vir die internasionale deelname in finansiering en handel. Suid-Afrikaanse banke staan voor die uitdaging om aan sy sosiale verantwoordelikhede te voldoen om die gemeeskap op te bou aan die een kant en die vereistes om aan internasionale standaarde te voldoen, soos deur die Lamfallussy veslag voorgeskryf, aan die ander kant. Die Reserwe bank van Suid-Afrika dwing beleid af via die Banking Council of South Africa, asook verskeie kommisies en verenigings wat fokus op die verskeie betaalstelsels. Die Reserwebank van Suid-Afrika beoog om 'n "Electronic Communications and Transaction Bill" teen die einde van 2001 te publiseer vir die regulering van elektroniese kommunikasie en traksaksies. In Wetlike raamwerk en die afdwing van sekere risiko verminderende metodes, byvoorbeeld item limiete, wat gedurende Januarie 2002 in werking gestel word en die wysiging in die kruising van tjeks dui op die drastiese stappe wat aangebring word om internasionaal mededingend te wees, asook by internasionale riglyne in te pas. Daadwerklike pogings om selfde dag verrekeninge in die hoë waardestelsel (SAMOS) te implementeer en te voldoen aan die neergelegde internasionale standaarde. Elektroniese geld word gedefinieer as 'n gememoriseerde waarde of voorafbetaalde produkte waarin rekord van fondse of beskikbare waardes van 'n kliënt gehou word. (Bank of International Settlements, 2001: 1). Verbruikers kry die voordeel van maklik toeganklike en goedkoop betalingsmetodes. (Bank of International Settlements, 1997: 6). Die deelname van nie-finansiële instansies in die betalingsprosesse, daarmee saam die ontwerp en algemene gebruik van onbekende digitale vorms van monetêre waardes hou 'n bedreiging in vir die beheer van die sentrale bank om monetêre beleid af te dwing en finansiële stabiliteit te verseker. Kaartgebaseerde elektroniese geldskema's word in sekere gevalle is die fasiliteit gekombineer met funksionaliteit in die vorm van toegangsbeheer, houer identifikasie, of plaaslike transport kaarte. Netwerk gebaseerde elektroniese geldskema's is slegs in beperkte aantal lande operasioneel of onder ontwikkeling en bestaande wetgewing aangaande betaalstelsels word hoofsaaklik toegepas op die skema's. Daar word voorgestel dat die Suid-Afrikaanse Reserwebank moet op 'n voortdurende basis bestaande en nuwe verskillende betaalstelsels moniteer vir die daarstelling van 'n verlaagde risiko, met 'n stabiele- en veilige omgewing wat steun verleen aan die land se ekonomie, sowel as die omliggende Suider- Afrikaanse lande. Verdere pogings moet aangewend word word om hoë-waarde betaalstelsels (SAMOS) se sistemiese risiko te verminder deur van dieselfde dag vereffening gebruik te maak. Ter afsluiting moet daar met gekoordineerde aksies, wat plaaslik en internasionaal bestaan, aangewend word om finansiële dissipline daar te stel, risko's te bestuur en internasionale handel te bevorder.

Globalisation and financial liberalisation has increased the linkages across countries in recent times. The existence of money market links has important implications for both domestic monetary policy and for investment decisions. This study examines the linkages between South Africa’s money market and selected major international money markets. The objectives of the study are firstly to examine the links between the repo rate of South Africa and the central bank rates of the EU, Japan, UK and US. Secondly, is to compare the influence of domestic and foreign monetary policy decisions on South Africa’s money market. The third objective is to examine the long run relationship between the South African money market and the money markets of its major trading partners. Three estimation techniques are used to examine the different links. Principal components analysis, four tests of cointegration, and stationarity tests of the spreads/risk premium between South Africa’s interest rates and the interest rates of the other countries. All three techniques show that there is no long-run link between South Africa’s central bank rates and the central bank rates of the other countries. This shows that the repo rate does not depend on movements in other central bank rates. Domestic money market interest rates respond strongly to changes in the repo rate whilst showing no dependence on central bank rates of the other countries. This confirms the autonomy of the South African Reserve Bank in carrying out policy objectives. When the risk premium is accounted for under the third technique, evidence of integration is found. This indicates that the risk premium plays a crucial part in the level of integration between South Africa and the countries included in the study.

An analysis of the current monetary policy framework in South Africa, which followed the exampie of a number of developed countries by implementing an inflation-targeting regime in 2000, is presented. The primary goal of the framework is to establish price stability, with financial stability a secondary objective. However, as has been evident in other countries, price stability does not guarantee financial stability. Movements in asset prices and the development of asset price bubbles have resulted in a number of episodes of financial instability, which negatively impacted on the growth and development of the countries involved. In addition, the majority of these episodes have occurred in periods of low and stable inflation. The dissertation analyses whether monetary policy would be more efficient if asset price movements were incorporated within the inflation-targeting regime. International experience indicates that early intervention of monetary policy can dampen the negative effects that result when an asset price bubble "bursts". However, if the monetary authorities act too early the effects on the economy can be just as disruptive. The literature is scrutinized to establish what the most effective form of monetary policy should be. The results are then transposed within the South African context to establish how the South African Reserve Bank can best ensure both price and financial stability.