Acta Universitatis Danubius. Œconomica, Vol 14, No 6 (2018)

An Assessment of the Effectiveness of Monetary Policy in South Africa

Daniel Francois Meyer, Jacques de Jongh, Devan Van Wyngaard

Abstract


Abstract: Inflation affects the total economy and should be controlled effectively, to support economic growth. However, recent years have shown inefficiencies of inflationary control in South Africa as the country is faced with both structural and cost-push inflation in a low growth economy. The objective of this study was to investigate whether these inflation types are effectively controlled by the utilization of interest rates and money supply by the South African Reserve Bank (SARB). Secondary data from the SARB were collected for 69 quarters from 2000 Q1 to 2017 Q1. An autoregressive distributive lag model (ARDL) was used to analyse the data for long-run co-integration and a vector error correction model (VECM) to test for short-run relationships. Variables included consumer price index (CPI), money supply, interest rate (repo rate), government expenditure as well as trade openness. The results indicated that both long and short-run relationships exist between the variables. The study revealed that structural and cost-push inflation exist in South Africa, making the current methods of monetary policy implementation less effective to control inflation and also has an impact on economic growth.


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