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South African Reserve Bank

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No 16: The monetary transmission mechanism in South Africa
Publish Date:
M M Smal and S de Jager
Occasional Papers
The South African Reserve Bank adopted an inflation targeting monetary policy framework in February 2000. This is essentially forward-looking, in that a specific target for inflation has to be met within a predetermined time. The forward-looking nature of the framework makes it imperative to understand and acknowledge the time lag for monetary policy to impact on the real economy and eventually inflation, i.e. the transmission mechanism of monetary policy.
This paper firstly investigates the evolution of monetary policy in South Africa since the 1980s, before briefly discussing the various channels of the transmission mechanism. A small model was developed for this article to illustrate the various channels of the transmission mechanism and demonstrate the time lags of a monetary policy initiative.  The results of the model indicate that there is a fairly long time lag of approximately one year before a change in monetary policy affects the level of real economic activity, and another year before it has an effect on the domestic price level. However, the study concludes with a word of caution that the actual effects of the monetary policy initiative may change over time and that the magnitude and time lags of these effects will depend on various factors prevalent at that particular time.
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