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ISOLATING A MEASURE OF INFLATION EXPECTATIONS FOR THE SOUTH AFRICAN FINANCIAL MARKET USING FORWARD INTEREST RATES
Author(s) -
Reid Monique
Publication year - 2009
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/j.1813-6982.2009.01218.x
Subject(s) - economics , proxy (statistics) , inflation (cosmology) , real interest rate , monetary policy , interest rate , order (exchange) , inflation targeting , measure (data warehouse) , nominal interest rate , monetary economics , compensation (psychology) , macroeconomics , finance , machine learning , theoretical physics , psychology , physics , database , computer science , psychoanalysis
The inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa, and offers an additional method, which is market based. The methodologies of Nelson and Siegel and Svensson are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market's inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.