Developing an Income-Distribution- Sensitive Taylor Rule: An Application to South Africa

This research has attempted to derive a new Taylor-type monetary policy rule which is sensitive to changes in the functional distribution of income proxied for by the labourer’s share of national income. I then apply this new policy rule to South African data between quarter 4 of 2001 and quarter 4 of 2021. This rule, once applied, yields favorable results in terms of goodness of fit relative to other such rules applied to South African data. The application of this rule to South Africa also yields an interesting finding- the South African Reserve Bank, most likely as a means to stabilise the South African macroeconomic system, reacts more to changes in the functional distribution of income than to an equivalent change in the inflation rate or output growth. I suggest that this formulation of the Taylor rule, and others like it, be used and developed further in future research.