The viability of implementing inflation targeting as a policy solution to combat inflation in South Africa

Gill, Madeline (2002-03)

Thesis (MBA)--Stellenbosch University, 2002.

Thesis

ENGLISH ABSTRACT: Inflation has many negative effects and for this reason the South African Reserve Bank, like central banks in most countries, is strongly opposed to inflation and uses its monetary policy to combat it. This action is necessary for continued economic growth, prosperity and a fair distribution of income and wealth. Low inflation and a stable financial environment are important prerequisites for the achievement of these objectives on a long-term basis. In order to combat inflation in South Africa it was announced in the Budget Speech on the 23 February 2000, that a policy of inflation targeting would be implemented in South Africa. The objective is to bring inflation within the target band of three to six percent by the year 2002. Inflation targeting has been successful in helping New Zealand, Canada, Israel, the United Kingdom, Sweden, Australia and Spain achieve and maintain low rates of inflation. This does not mean, however, that inflation targeting has been implemented without incurring costs in lost output and employment, but there is no evidence that the adoption of inflation targets has produced harmful effects to the real economy over the long-term. Instead, the low inflation rates achieved in the inflation targeting countries have improved the prospects for sustainable longterm growth. However, inflation targeting is not appropriate for all countries. There are certain developing countries that do not meet the basic requirements for adopting inflation targeting. In this study the viability of implementing inflation targeting as a policy solution to combat inflation in South Africa is examined. In order to determine this, focus is placed on the key characteristics and features of inflation targeting. The reasons why countries have implemented inflation targeting are viewed and the prerequisites that must be met before inflation targeting can be implemented are discussed. The advantages and disadvantages of this approach are also highlighted. Furthermore, focus is placed on how inflation targeting has been implemented in some of the advanced economies in order to determine whether it can be successfully implemented in developing countries, and if so, in which developing countries. Finally equipped with an .understanding of the theoretical aspects of inflation targeting and drawing from the lessons of the international experiences, focus is placed on how viable it is to implement inflation targeting in South Africa.

AFRIKAANSE OPSOMMING: Wêreldwyd neem Sentrale Banke van ontwikkelende lande, aktiewe stappe in die bekamping van inflasie. Die Suid Afrikaanse Reserwe Bank, net soos ander Sentrale Banke is ook gekant teen inflasie en maak gebruik van hulle monetêre beleid vir die bekamping van inflasie. Bekamping van inflasie is van kardinale belang om voortgesette ekonomiese groei, welvaart en 'n regverdige verspreiding van inkomste en rykdom te verseker. Lae inflasie en 'n stabiele finansiële omgewing is belangrike voorvereistes om hierdie finansiële doelwitte in die langtermyn te bereik. Ten einde inflasie in Suid Afrika te bekamp, het die Minister van Finansies in sy begrotingsrede van 23 Februarie 2000, aangekondig dat Suid Afrika 'n beleid van inflasie bekamping gaan implementeer. Die doelwit van so beleid sou wees om inflasie binne 'n drie tot ses persent teikenband te beperk teen die jaar 2002. Inflasie bekamping was suksesvol in die bekamping van inflasie in lande soos New Zealand, Kanada, Israel, Die Verenigde Koningkryk, Swede, Australia en Spanje, waar lae inflasie koerse behaal is en gehandhaaf word. Alhoewel 'n beleid van inflasie bekamping met indirekte koste en 'n verlies in produksie en werksgeleenthede gepaard gaan, is daar geen bewyse dat die implementering van inflasie teikens 'n wesenlike effek op die ekonomie in die langtermyn het nie. Inteendeel, lae inflasie in die teikengroep lande het verseker dat voortdurende ekonomiese groei oor die langtermyn gehandhaaf kon word. 'n Beleid van inflasie bekamping is nie wenslik vir alle lande nie. Daar is verskeie ontwikkelende lande wat nie aan die basiese voorvereistes vir die implementering van 'n beleid van inflasie bekamping voldoen nie. In hierdie studie word die wenslikheid, al dan nie vir die implementering van 'n beleid van inflasie bekamping, as 'n beleidsoplossing in die bekamping van inflasie in Suid Afrika ondersoek. Ten einde dit te bereik word die fokus op die hoof karaktertrekke en einskappe van inflasie bekamping geplaas. Die redes waarom lande inflasie bekamping implementeer, asook die voorvereistes waaraan voldoen moet word, alvorens 'n beleid van inflasie bekamping geimplementeer kan word, word bespreek. Die voor- en nadele van hierdie werkswyse word ook uitgelig. Voorts word gefokus op die implementering van inflasie bekamping in ontwikkelde ekonomieë, om te bepaal of dit op die ekonomieë van ontwikkelende lande toegepas kan word, en indien wel, watter ontwikkelende lande? Toegerus met 'n begrip van die teoretiese aspekte van inflasie bekamping, gepaardgaande met die internasionale ervarings, word daar gefokus op die wenslikheid, vir die implementering van 'n beleid van inflasie bekamping in Suid Afrika.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/53187
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