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Monetary policy and inflation in S outh A frica: A VECM augmented with foreign variables
Author(s) -
Waal Annari,
Eyden Reneé
Publication year - 2014
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/saje.12027
Subject(s) - economics , purchasing power parity , monetary policy , autoregressive model , monetary economics , inflation (cosmology) , econometrics , interest rate parity , macroeconomics , interest rate , exchange rate , physics , theoretical physics
We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, known as an augmented VECM or VECX *, suitable for a small open economy like S outh A frica. This model is novel for S outh A frica in two ways: it is the first VECX * developed to analyse monetary policy and the first model that uses time‐varying trade weights to create the foreign series. We impose three significant long‐run relations (augmented purchasing power parity, uncovered interest parity and Fisher parity) to investigate the effect of a monetary policy shock on inflation. The results suggest the effective transmission of monetary policy.