Isolating a measure of inflation expectations for the South African financial market using forward interest rates

Date
2009
Authors
Reid M.
Journal Title
Journal ISSN
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Abstract
The inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa, and offers an additional method, which is market based. The methodologies of Nelson and Siegel and Svensson are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market's inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight. © Journal compilation © 2009 The Economic Society of South Africa.
Description
Keywords
currency market, financial market, inflation, interest rate, monetary policy, planning method, policy implementation, structural adjustment, Africa, South Africa, Southern Africa, Sub-Saharan Africa
Citation
South African Journal of Economics
77
3