Inflation targeting and it's applicability to the South African economy.

Abstract

With the change in Governor at the South African Reserve Bank in August 1999, also came the announcement by the South African monetary authorities of the decision to move to formal inflation targeting. There seems, however, to be a lack of understanding by the South African public on the concepts and issues of inflation targeting and thus the potential benefits. This is mainly due to the lack of international evidence given that inflation targeting is not even a decade old yet. This study was largely motivated by the need for a more comprehensive understanding of the intricacies of inflation targeting as the future monetary policy strategy. Thus, the aim of this study is to examine inflation targeting in its entirety and determine whether South Africa is truly ready for the new age of inflation targeting. There are three prerequisites for inflation targeting: 1. central bank independence 2. having sole target 3. existence of stable and predictable relationship between monetary policy instrument and inflation. Inmany developing countries, the use of seigniorage revenues as an important source of financing public debts, the lack of commitment to low inflation as a primary goal by monetary authorities, considerable exchange rate flexibility, lack of substantial operational independence of the central bank or of powerful models to make domestic inflation forecasts hinder the satisfaction of these requirements.