Even though major advances in economic theory and modelling have in some
cases furthered our understanding of how the economy works, the system as a
whole has become more complex. If policymakers had perfect knowledge about
the actual state of the economy, the various transmission mechanisms as well as
the true underlying model, monetary intervention would be greatly simplified. In
reality, however, the monetary authorities have to contend with considerable
uncertainty in relation to the above-mentioned factors.
This said, uncertainty has mostly been neglected in both the theoretical and
empirical literature focusing on monetary policy analysis. Nonetheless, findings
from a review of theoretical literature that does exist on this topic suggest that
optimal central banks act more conservatively when faced with uncertainty.
Similarly, empirical findings from the literature also favour conservatism. However,
there is some evidence to suggest that this is not always the case. These results
suggest that central banks do not always act optimally when faced with uncertainty. The limited number of industrial country cases examined prevents any
generalised view from emerging. If anything, the literature findings suggest that
central bank behaviour differs across countries.
This thesis aims to contribute to the empirical literature by studying the effects of
uncertainty on monetary policy in the developing country case of South Africa. In
simplest terms, the thesis seeks to establish whether or not the South African
Reserve Bank (SARB) responded optimally to uncertainty as suggested by
theoretical models thereof. To this end, the thesis employs a theoretical model
which resembles a structural rule-based approach. The optimal interest rate rule
was derived given a set of structural equations relating to demand, the Phillips
curve and the real exchange rate.
To incorporate uncertainty, it is assumed that the coefficients are dependent on
the variances of the exogenous variables, namely inflation, the output gap and the
exchange rate. The uncertainty adjusted model allows us to investigate whether
monetary policy is more aggressive or passive when uncertainty about the relevant
exogenous variable increases. Inflation, output gap and exchange rate uncertainty
estimates were derived through GARCH-model specifications related to the
structural equations as defined in the theoretical model.
The investigation considered both indirect and direct uncertainty effects with a
sample period stretching from 1990 to 2011. The findings reported in this thesis provide strong evidence in support of the
notion that uncertainty plays a significant role within the South African monetary
policy landscape and contributes towards explaining the SARB’s actions.
Furthermore, the results suggest that the SARB did in fact act optimally in
responding more conservatively to target variable fluctuations on average. Also,
the findings could potentially strengthen the case for inflation targeting as a
monetary policy regime, as the results indicate a marked decline in the effects of
uncertainty under inflation targeting than before. / Economics / D. Com. (Economics)
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:unisa/oai:umkn-dsp01.int.unisa.ac.za:10500/10197 |
| Date | 25 July 2013 |
| Creators | De Hart, Petrus Jacobus |
| Contributors | Hodge, D. |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | 1 online resource (xvi, 263 leaves) |
| Rights | University of South Africa |
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