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Project Record

Objectives:

The research involves collaboration with policy-makers at the highest level, and capacity-building programmes. It also aims to translate lessons from past research on SSA more broadly, conducting collaborative research with African central bankers in five countries into future monetary policy issues. The policy findings will be of considerable interest to emerging economies in Africa, and elsewhere.

Background:

In the next five years, monetary policy in sub-Saharan Africa will undergo important regime changes. Given capital account liberalisation, exchange rate reform and short/medium-term constraints on fiscal policy (e.g. cash budget or medium-term fiscal frameworks), monetary policy has the major responsibility for curbing inflation and currency instability, and yet trying to ensure sufficient growth for longer-term political stability. South Africa (S.A.) recently became the first African country to follow the sweeping trend in OECD countries by adopting inflation targeting. Several developing countries, such as Uganda, are scrutinising the institutional design and performance in S.A. for their own future monetary management. There are key policy questions, both for S.A. itself and for other countries. These include (i) the sustainability of inflation targeting or a hybrid monetary policy rule under highly volatile capital flows; (ii) the output costs entailed by inflation targeting versus other types of monetary policy rules - and the role of the exchange rate in a hybrid rule; (iii) greater clarity through empirical models on the mechanisms of monetary transmission; (iv) the institutional and technical demands placed on governments as regards transparency and governance, and in modelling and forecasting with limited capacity; and (v) how to develop deeper bond and money markets for monetary transmission. Despite its importance, there is little rigorous research on these issues conducted on developing countries either in the U.K. or world-wide, while in African itself, capacity is seriously limited. The project aims to provide an original and sophisticated analysis, exploring policy questions for the viability of inflation targeting that have emerged in S.A. with implications for sustainable growth. The research involves collaboration with policy-makers at the highest level, and capacity-building programmes. The project also aims to translate lessons from past research on S.A. more broadly, conducting collaborative research with African central bankers in 5 countries into future monetary policy issues, as above. The policy findings will be of considerable interest to emerging economies in Africa, and elsewhere.

Intended Outputs:

A. Building on our previous research toward improved monetary policy in S.A.:
1. To contrast growth and inflation outcomes under exogenous shocks for current and alternative monetary policy rules, by building and simulating a 15-equation structural macroeconomic model.
2. To measure rigorously the rate and degree of pass-through of exchange rate shocks to inflation using the structural macroeconomic model, providing crucial information for interest rate setting, and design of improved escape clauses.
3. To estimate rigorously an equilibrium real exchange rate using the structural macroeconomic model, to improve monetary policy evaluation.
4. To initiate the first compilation of personal wealth stocks by the SARB, and to transfer modelling expertise from the proposed project to SARB modellers.
5. To synthesise methods and lessons from over 15 papers in the DFID projects in a book, to maximise the usefulness and policy impact.

B. Translating S.A. lessons to other African countries with the ACBN:
6. To evaluate the viability of future monetary policy in 5 African countries, by detailing the comparative governance and operation of monetary policy, and its constraints.
7. To produce the first best practice inflation forecasting models (given data constraints) for 5 African countries, gaining insight into the monetary transmission mechanisms.

General Notes:

While this project is based in South Africa, Ethiopia, Mozambique, Tanzania and Uganda, it has implications for other transition economies in Africa, East Europe and the Former Soviet Union.

Read the id21 Research Highlight: Inflation targeting has helped stabilise the South African economy

Paper File Reference:

ESG 0103 0741/0243/002A