Abstract
M. Comm.
Although there has been several work done on monetary policy and inflation in South
Africa, this dissertation is intended to add and expand on the existing literature on the
subject with data dating back to 1970. The dissertation was inspired by recent
international research that has indentified that a large Bayesian VAR model normally
performs better than the normal SVAR model. Given that there has already been differing
conclusions in literature on whether interest rates are effective as a tool to control
inflation, there is therefore an opportunity to assess monetary policy using a different and
more robust modelling framework. The choice of a sample is informed by the fact that
prior to inflation targeting and within the period under consideration; interest rates
remained a core factor in monetary policy management. Some of the literature will be
discussed in detail in chapter 2. This dissertation will introduce the large BVAR model
with 14 variables in the South African economy. In comparison, the SVAR model suffers
from the curse of dimensionality that is eliminated by using more variables with the
Large Bayesian VAR with the response functions of all 14 variables.
The objective is therefore to determine whether interest rate changes in South Africa have
a meaningful and desired effect on inflation. A substantial amount of recent literature was done within the environment of inflation targeting; however, our study intends to
measure more the responsiveness of interest rates and other macro variables to monetary
policy. The period of inflation targeting in South Africa provides more useful data and
evidence on the responsiveness of the macro variables given the direct policy approach it
represents versus the previous regime and hence it is covered in more detail in the
dissertation. We also assess, in the process, the main drivers behind inflation in South
Africa, in an effort to establish whether the country suffers from cost- push or demandpush.
The type of inflation should also assist in providing recommendations on the
appropriate response to inflation.