Inflation targeting and the Fisher effect in South Africa: an empirical investigation

Mitchell-Innes, H.A.; Aziakpono, M.J.; Faure, A.P.

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Title:	Inflation targeting and the Fisher effect in South Africa: an empirical investigation
Authors:	Mitchell-Innes, H.A. Aziakpono, M.J. Faure, A.P.
Year:	2007
Periodical:	South African Journal of Economics
Volume:	75
Issue:	4
Pages:	693-707
Language:	English
Geographic term:	South Africa
Subjects:	inflation monetary policy interest rates central banks 2000-2009
External link:	https://onlinelibrary.wiley.com/doi/10.1111/j.1813-6982.2007.00143.x/pdf
Abstract:	This paper analyses the relationship between expected inflation and nominal interest rates during the phase of the South African Reserve Bank's (SARB) inflation targeting monetary policy regime, from 2000 to 2005. Specifically, it investigates the Fisher hypothesis (1930) that nominal interest rates move one-to-one with expected inflation, leaving the real interest rate unaffected. The analysis distinguishes between a short-run Fisher effect and a long-run Fisher effect. Using cointegration and error correction models (for monthly data for the period April 2000 to July 2005), it was found that the short-run Fisher hypothesis did not hold during the relevant period under the inflation targeting monetary policy framework in South Africa. This is attributed to a combination of the SARB's control over short-term interest rates and the effects of the monetary transmission mechanism. The long-run Fisher hypothesis could not be confirmed in its strictest form: while changes in inflation expectations move in the same direction as the nominal long-term interest rate. This suggests that monetary policy has an influence on the real long-term interest rate, which has positive implications for general economic activity, thus confirming the credibility of the inflation targeting framework. Bibliogr., notes, ref., sum. [Journal abstract]

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