Abstract
The general purpose of this study is to determine how South Africa’s early experience with the inflation targeting framework compares with the early experiences of Brazil, Chile, Israel, the Czech Republic and Poland. One developed economy, namely New Zealand, is included in the study since it was the pioneer of the inflation targeting framework. The experiences of these countries are compared along three dimensions: the stress tests the frameworks were subjected to and the monetary authorities’ responses to these tests; the adjustments made to the frameworks, operational and institutional procedures; and the credibility losses or gains as a result of these experiences.
In order to arrive at a satisfactory conclusion to the problem a number of questions are explored. The theoretical basis of inflation targeting is analysed; the nature of South Africa’s framework is assessed to see how it conforms to general practices; South Africa’s early experience under the inflation targeting framework is assessed; and, lastly, South Africa’s experience is compared with the experiences of the six countries mentioned in the first paragraph.
The assessment in this study shows that South Africa’s experience is not out of line when compared with other emerging-market countries. Many of the emerging markets surveyed faced significant stress tests and long-term obstacles that contributed to their failure to achieve their inflation targets in the early years of implementation. In response, the central banks surveyed sought to focus on the primary goal of monetary policy and to counter the second-round effects. As they became more experienced at operating an inflation targeting framework, some of the countries refined their frameworks.
Ultimately, the survey draws lessons from the common experience of the seven countries assessed. It shows that credibility is key to the success of an inflation targeting framework, as is a supportive context. However, the survey also highlights that simply judging a country’s monetary policy success on
whether it achieves its inflation targets is too limited an assessment for justifying the merit of an inflation targeting framework.
Prof. S. Chetty