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Inflation expectations in South Africa : non-rational, intertemporal and idiosyncratic heterogeneity represented by a term structure approach

dc.contributor.advisorDu Plessis, Stanislaus Alexanderen_ZA
dc.contributor.authorCrowther-Ehlers, Neleneen_ZA
dc.contributor.otherStellenbosch University. Faculty of Economic and Management Sciences. Dept. of Economics.en_ZA
dc.date.accessioned2019-11-17T21:54:09Z
dc.date.accessioned2019-12-11T06:48:01Z
dc.date.available2019-11-17T21:54:09Z
dc.date.available2019-12-11T06:48:01Z
dc.date.issued2019-12
dc.identifier.urihttp://hdl.handle.net/10019.1/107113
dc.descriptionThesis (PhD)--Stellenbosch University, 2019.en_ZA
dc.description.abstractENGLISH SUMMARY : A key factor in the inflation-targeting regime is the psychological process by which decision makers form their expectations of future inflation. Economic models often assume that on aggregate, decision makers form inflation expectations uniformly and rationally, that is, without bias or informational inefficiencies. These assumptions of rational, homogenous expectations formation are computationally convenient and allow for important model simplifications. From a monetary policy perspective, it is important to analyse and test these assumptions, since under full rationality, only unexpected changes in inflation will affect the real economy. Departures from homogeneity require monetary authorities to understand the nature of expectations formation so that the appropriate policy can be prescribed. In this study, data from both the Bureau for Economic Research (BER) Inflation Expectations Survey and the Reuters Inflation Expectations (RIE) Survey were evaluated over different forecasting horizons to assess the validity of these assumptions across different economic groups in South Africa. This study investigates factors that likely underlie the actual decision rules whereby decision makers formed inflation expectations during the inflation targeting regime in South Africa. The results reported did not support the hypothesis of exclusively rational expectations, mainly due to the respondents’ inefficient use of available information. However, the respondents were not passive or inattentive, since they did observe and respond to certain influences, though heterogeneously and mainly in the short-term. Heterogeneity was observed across different survey groups when considering adaptive behaviour, information diffusion, perceived influence of external shocks and learning behaviour. Intertemporal heterogeneity - the differences in the processes that appear to govern expectation formation at short-term horizons compared to longer-term horizons - stands out. Multiple focal points (digit preferencing) were observed in the distribution of the survey data and together with the associated heterogeneity can complicate traditional estimation approaches. Particular attention was given to potential influences on longer-term perceived inflation expectations of the respondents to assess the heterogeneity between groups and also if these were anchored. Conventional regression analyses supported this evaluation as well as a state-space Kalman filter approach to estimate the term structure of inflation expectations. The latter was based on the Nelson-Siegel (1987) methodology for term structure estimation to estimate the perceived longer-term anchor of the respondents. None of the approaches used in this study to approximate longer-term inflation expectations provided estimates close to the midpoint of the inflation target range for any of the three BER survey groups analysed. These estimates were instead mostly clustered around the upper end of the target range. A richer specification of South African inflation expectations formation is therefore proposed that sufficiently represent both the short- and longer-term data generating processes involved in forming inflation expectations, based on the observed non-rationality, multiple forms of heterogeneity and multi-modal distributional characteristics shown in the study presented in this thesis. Term structure analyses provide a robust, flexible and encompassing framework for facilitating a parsimonious representation of both short- and longer-term inflation expectations in South Africa and are suggested for empirical inflation expectations modelling frameworks.en_ZA
dc.description.abstractAFRIKAANSE OPSOMMING : 'n Sleutel-faktor in inflasieteiken-beleidsomgewings behels die psigiese proses waardeur besluitnemers hul verwagtings oor toekomstige inflasie formuleer. Ekonomiese modelle neem dikwels aan dat besluitnemers op 'n eenvormige en rasionele wyse inflasieverwagtings vorm, dit wil sê, sonder vooroordeel of informatiewe ondoeltreffendheid. Hierdie aannames van rasionele, homogene verwagtingsvorming vergemaklik berekeninge en vereenvoudig modelspesifikasies. Uit 'n monetêre beleidsperspektief is dit belangrik om hierdie aannames te ontleed en te toets, aangesien slegs onverwagse veranderinge in inflasie die reële ekonomie sal beïnvloed gegewe ‘n omgewing van uitsluitlik rasionele inflasieverwagtingsvorming. Afwykings van homogeniteit vereis dat monetêre beleids-owerhede die aard van verwagtingsvorming verstaan sodat toepaslike beleid toegepas kan word. In hierdie studie is data van die Buro vir Ekonomiese Ondersoek (BER) se inflasieverwagtings-opname asook die Reuters-inflasieverwagtingsopname (RIE) oor verskillende voorspellingshorisonne geëvalueer om die geldigheid van hierdie aannames vir verskillende ekonomiese groepe in Suid-Afrika te bepaal. Hierdie studie ondersoek faktore wat moontlik onderliggend is aan die werklike besluitnemingsreëls waarvolgens besluitnemers inflasieverwagtings tydens die inflasieteiken- beleidsera in Suid-Afrika vorm. Die gerapporteerde resultate ondersteun nie die hipotese van uitsluitlik rasionele verwagtings nie, hoofsaaklik as gevolg van respondente se ondoeltreffende gebruik van beskikbare inligting. Die respondente was egter nie passief of onoplettend nie, aangesien hulle sekere invloede waargeneem het en daarop gereageer het, maar egter op heterogene wyses en hoofsaaklik oor die kort termyn. Heterogeniteit is waargeneem ten opsigte van die verskillende groepe wanneer aanpassingsgedrag, inligtings-diffusie, die invloed van eksterne skokke en leergedrag in ag geneem word. Intertemporale heterogeniteit – die verskil tussen verwagtingsprosesse gevorm oor kort- en langertermyn-horisonne – het voorgekom. Multimodale fokuspunte (of syfer-voorkeure) is waargeneem in die verdelings van die opname- data en dit, tesame met die gepaardgaande heterogeniteit, kan tradisionele beramingsprosedures belemmer. Aandag is veral gegee aan moontlike invloede op die langtermyn-inflasieverwagtings van die respondente, spesifiek die heterogeniteit van die groepe asook of die verwagtings geanker was. Konvensionele regressieontledings ondersteun hierdie evaluering sowel as 'n Kalmanfilter- benadering om die termynstruktuur van inflasieverwagtings te beraam. Laasgenoemde was gebaseer op die Nelson-Siegel (1987) metodologie vir termynstruktuur-beraming om die langertermyn inflasie-anker van die respondente te beraam. Geen van die benaderings wat in hierdie studie gebruik is om die langertermyn inflasie-anker te bepaal, het ramings naby die middelpunt van die inflasieteiken vir enige van die drie BER-opnamegroepe opgelewer nie. Hierdie ramings was eerder meestal gebondel rondom die boonste limiet van die inflasieteiken. 'n Ryker spesifikasie van die vorming van inflasieverwagtings in Suid-Afrika word daarom aanbeveel om beide die kort- en langertermyn-datagenererings-prosesse vir inflasieverwagtings voldoende te verteenwoordig in ‘n modelleringskonteks, gebaseer op die waargenome nie-rasionaliteit, veelvuldige vorme van heterogeniteit en multimodale verdelingseienskappe wat uit die studie geblyk het en in hierdie proefskrif aangetoon word. Termynstruktuurontledings bied 'n robuuste, buigsame en omvattende raamwerk vir die fasilitering van 'n kernagtige verteenwoordiging van beide kort- en langertermyn-inflasieverwagtings in Suid-Afrika, en word dus voorgestel vir empiriese inflasieverwagtings-modelleringsraamwerke.af_ZA
dc.format.extentxvi, 173 pages ; illustrations, includes annexures
dc.language.isoen_ZAen_ZA
dc.publisherStellenbosch : Stellenbosch University
dc.subjectInflation (Finance) -- South Africaen_ZA
dc.subjectRational expectations (Economic theory)en_ZA
dc.subjectHeterogenous expectationsen_ZA
dc.subjectTerm structure of Expectationsen_ZA
dc.subjectInflation risken_ZA
dc.subjectUCTD
dc.titleInflation expectations in South Africa : non-rational, intertemporal and idiosyncratic heterogeneity represented by a term structure approachen_ZA
dc.typeThesisen_ZA
dc.description.versionDoctoral
dc.rights.holderStellenbosch University


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