Monetary policy preferences and inflation targeting rules

The aim of the thesis is to address issues concerning modelling and evaluation of monetary policy by obtaining targeting rules from optimisation techniques using welfare loss functions that capture asymmetries and zone targeting behaviours. The motivation is that the specification of the most widely used monetary policy rule, i.e. the Taylor rule, may not adequately capture the stylised key features of monetary policy practice as has been shown by Nobay and Peel (2003), Aksoy et al. (2006) and Boinet and Martin (2008). The thesis also addresses the importance of the behaviour of certain financial asset prices and their implications in monetary policy decision making. It also analyses the impact of uncertainty about the true state of the economy on domestic interest rates. First, the response of monetary policy to deviations of inflation and output from their target values based on a framework that allows asymmetric and zone targeting monetary authorities preferences is estimated.1 Second, the monetary policy reaction function, which is augmented with a comprehensive index that collects and synthesises information from the financial asset markets is estimated for South Africa based on a framework that allows asymmetric and zone targeting monetary authorities preferences.2 Third, the impact of uncertainty about the state of the economy on monetary policy in South Africa using a framework that allows asymmetric and zone targeting monetary authorities preferences is analysed. The main findings are that the monetary authorities response towards inflation is zone symmetric and their response to output fluctuations is asymmetric. The second major finding is that the conditions in the financial asset markets form an important information set for the monetary authorities and that the monetary authorities pay close attention to the conditions in these markets by placing an equal weight on financial asset markets booms and recessions. The empirical results also reveal a significant impact of uncertainty about the state of the economy on domestic interest rates during the inflation targeting period and that the monetary authorities exhibit discretionary behaviour when implementing monetary policy under uncertainty. The thesis contributes to the body of knowledge in the field of economics by addressing important issues in monetary policy design and conduct using a framework that capture the stylised key features of monetary policy practice. All these issues are important in design and conduct of monetary policy. They are currently debated at many central banks including South Africa. © 2011 Author. All rights reserved. The copyright in this work vests in the author. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the author. Please cite as follows: Raputsoane, LJ 2011, Monetary policy preferences and inflation targeting rules, PhD thesis, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-10152011-122629/ > D11/9/88/ag