An institutional assessment of inflation targeting as a framework for monetary policy

Du Plessis, Stan,1972- (2003-12)

Dissertation (PhD)--Stellenbosch University, 2003.

Thesis

ENGLISH ABSTRACT: A number of themes run through this dissertation, the first of which is the importance of money in facilitating decentralised decision making by lowering transaction costs and by contributing to the definition and maintenance of property rights. A second (and more melancholy) theme is that government control of money has often been poor, and systematically so since the War. This leads to a third theme, the combined force of economic theory and central bank practice of the last quarter of a century or so has led to clearer limits to the discretionary power of government in the management of money. These limits are increasingly expressed as contingent rules containing explicit targets for monetary policy, for example an inflation target. The objective of this thesis is to evaluate inflation targeting both normatively and positively as a framework for monetary policy. A set of criteria from the New Institutional Economics literature is used to evaluate the extent to which inflation targeting captures the lessons from the three themes mentioned above, in both normative and positive dimensions. The practical importance of the thesis is in the application of this institutional evaluation to the inflation the targeting regime of recent vintage in South Africa, which leads to a number of policy recommendations. Part I consists of three chapters of which the first two are mainly abstract and concerned with the theory of the New Institutional Economics. The third chapter has a historical character and considers the history of and recent trends in monetary policy. These trends are consistent with adopting an inflation target as a framework for monetary policy. The second part of the thesis starts with a theoretical consideration of monetary policy rules in chapter 4, and is followed by a discussion of one such rule, inflation targeting, in chapter 5. This discussion starts with the theory of inflation targeting, but proceeds to details of actual inflation targeting central banks, with special reference the South African Reserve Bank (SARB). The history of anti-cyclical monetary in South Africa is also considered empirically to determine whether inflation targeting would represent an important new direction on this issue. Chapter 6 follows with a literature review of the empirical record of the first decade of inflation targeting internationally. The seventh chapter is the core of the thesis and provides the institutional evaluation of inflation targeting. This evaluation is applied to the present inflation targeting regime in South Africa, and leads to recommended policy reforms. These policy reforms are mapped on a two-dimensional chart that indicates their priority and the expected cost of the associated institutional reform. Additionally a new econometric methodology is used in chapter 7 to gauge the contribution of monetary policy to the more stable economy of recent years. In part 3 the focus of the thesis turns to certain political economy considerations that arise from the independence of the central banks (as is typical for inflation targeting central banks). Chapter 8 considers the issue of central bank independence and is followed by an application of constitutional economics to inflation targeting in chapter 9. Whereas the bulk of the dissertation is concerned with the positive evaluation of inflation targeting, chapter 9 attempts a normative evaluation using the Pareto-Wicksell criterion. Both the positive and normative assessments in this thesis support the case for inflation targeting as a framework for monetary policy,

AFRIKAANSE OPSOMMING: Die doel van hierdie proefskrif is 'n institusionele evaluering van inflasieteikening as raamwerk vir monetêre beleid. Vir hierdie doel is 'n stel kriteria saamgestel uit die literatuur van die Nuwe Institusionele Ekonomie met die oog op 'n positiewe en 'n normatiewe evaluering van inflasieteikening as 'n raamwerk vir monetêre beleid. Die praktiese waarde van die tesis lê in die stel institusionele hervormings wat voorgestel word om die stelsel van inflasieteikening in Suid- Afrika meer doeltreffend en normatief meer gewens te maak. Etlike temas loop deur die proefskrif, maar veral drie verdien vermelding in die opsomming, naamlik: eerstens, die belangrikheid van die monetêre stelsel om gedesentraliseerde besluitneming te vergemaklik en as bydraende faktor in die vestiging van eiendomsreg. Tweedens, hoewel moderne owerhede tipies 'n monopolie op die plaaslike geldeenheid bestuur, het die monetêre bestuur in die moderne tydgewrig (veral sdert WOII) veel te wense oorgelaat. Hierdie wanbestuur was boonop telkens sistematies. Derdens, beide teoretiese ontwikkelings en die praktyk van sentrale bankwese het die afgelope kwarteeu aanleiding gegee tot 'n terugrol van die regering se rol in monetêre beleid en die toenemende gebruik van sistematiese beleidsreëls as raamwerk vir monetêre beleid. Die eerste deel van die proefskrif beskou die teorie van die Nuwe Institusionele Ekonomie in hoofstukke 1 en 2. Die derde hoofstuk is histories van aard en beskou die geskiedenis van moderne monetêre beleid en die tendense wat daaruit afgelei kan word. Afdeling twee fokus meer nougeset op inflasieteikens en begin met die teorie van beleidsreëls in hoofstuk 4. Die vyfde hoofstuk volg met 'n interpretasie van inflasieteikens as een van die sogenaamde terugvoerreëls vir monetêre beleid wat sedert die laat sewentigerjare ontwikkel is en sedertdien gewild geword het. 'n Toenemende aantal ontwikkelde- en ontwikkelende-lande het gedurende die afgelope dekade (en langer) inflasieteikens as raamwerk vir monetêre beleid aangeneem. Hoofstuk ses evalueer die empiriese rekord van hierdie kort geskiedenis. Die sewende hoofstuk is die kern van die tesis en bevat die institusionele evaluering van die inflasieteikens aan die hand van die kriteria saamgestel in hoofstuk 1, met spesifieke toepassing op Suid-Afrika. 'n Nuwe ekonometriese tegniek word ook in hoofstuk 7 gebruik om die bydrae van monetêre beleid tot die meer stabiele ekonome van onlangse tydgewrig te kwantifiseer. Die netelige institusionele kwessie van onafhanklik sentrale banke word rue 111 hoofstuk 7 bespreek rue, maar staan oor tot deel drie van die proefskrif waar die politieke-ekonomie van inflasietekens bespreek word. Hoofstuk 8 handel dan oor onafhanklike sentrale banke, met toepassing op die SARB, terwyl hoofstuk 9 'n toepassing is van die konstiutionele ekonomie op inflasieteikening. Hoofstukke 8 en 9 bied derhalwe verdere positiewe evaluering van die instrument-onafhanklike SARB onder inflasieteikens, asook 'n normatiewe evaluering van inflasieteikens aan die hand van die Pareto-Wicks ell kriteria wat uit hoofstuk 2 spruit. Beide die normatiewe en positiewe evaluerings ondersteun die saak ten gunste van inflasieteikens as raamwerk vir monetêre beleid.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/53268
This item appears in the following collections: