Doctoral Dissertations
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Browsing Doctoral Dissertations by Author "Kaseeram, Irrshad"
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- The literature review highlights an ongoing debate regarding the effectiveness of inflation targeting (IT) in anchoring expectations, stabilizing output, reducing the inflation rate, and lowering the volatility and persistence of inflation. The study further argues that the perceived success of IT may represent nothing more than “conservative window dressing,” whereby interest rates are raised to maintain low inflation at the expense of output losses. Through three independent essays, this study contributes to the debate on the effectiveness of IT and the nature of conservative monetary policy. The first essay conducts a detailed econometric investigation into whether the inflation expectations of various market participants—namely financial analysts, business executives, and trade unionists—are anchored to the inflation target. If expectations are anchored, this implies that the central bank’s IT framework is viewed as credible (the credibility proposition). If not, the policy is deemed non-credible by economic agents. The Cruijsen and Demertzis (2010) vector autoregression framework is employed when the inflation and expectations data are stationary; however, for nonstationary data, as in South Africa’s case, Johansen’s (1991) cointegration and vector error correction modelling techniques are applied. The findings reveal that only financial analysts regard the South African Reserve Bank’s IT framework as credible, whereas business executives and trade unionists do not. The second essay examines whether inflation volatility and persistence have declined since the adoption of IT, given that IT is intended to anchor expectations around a target or band, thereby reducing these dynamics. Using GARCH, GARCH-M (in-mean), and AR(2) methodologies, the study evaluates South Africa’s performance in this regard. To avoid erroneous conclusions, the analysis incorporates structural break tests, including Bai and Perron (2003), Lee and Strazicich (2003), Andrews and Ploberger (1994), and Lumsdaine and Papell (1997). The results show no significant changes in inflation volatility or persistence between the pre- and post-IT periods. The third essay estimates forward-looking hybrid Taylor-type reaction functions using the General Method of Moments (GMM), following the methodologies of Clarida, Gertler and Gali (1998), Gerdesmeier and Roffia (2003), and Hayo and Hofmann (2005). The results indicate that during the IT period, South Africa pursued a conservative and predictable monetary policy, characterized by a high weighting on inflation reduction and relatively low weighting on output deviations when setting the repo rate. Additionally, the study compares the IT experiences of Chile, Brazil, and Turkey with that of South Africa. The findings suggest that although IT is effective across these countries in reducing inflation and supporting sustainable economic growth, questions remain regarding its effectiveness in anchoring inflation expectations, reducing volatility and persistence, and stabilizing output at its potential level. Overall, the synthesis of the three essays indicates that South African authorities have not fully succeeded in convincing price and wage setters that IT can credibly maintain inflation within the target band. As a result, inflation and inflation volatility persist. Moreover, the success of IT often depends on raising the repo rate to prevent second-round effects of supply shocks (e.g., oil price increases or currency depreciations), a policy stance that may undermine output stabilization and complicate the future transformation of monetary policy.
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