Appropriateness of inflation targeting in South Africa

Abstract

In 2001, South Africa adopted inflation targeting as the monetary policy framework. The principal of the framework is to maintain inflation within the target band of 3% to 6%. However the policy has been heavily criticised. The purpose of this research is to contribute to the debate as to which monetary policy framework is the most appropriate for South Africa. This research intends to examine the inflation targeting framework advocated by government against the alternatives to inflation targeting. The research will assess monetary policy frameworks of inflation targeting, flexible inflation targeting with a wider target band, real targeting, exchange rate targeting and non-inflation targeting, within the context of international and local best practices and lessons of experience. The methodology in the research mainly followed a qualitative design principle. The main methods of data collection were personal interviews, literature review and secondary data from institutions such as South African Reserve Bank and Statistics South Africa. The data collected was analyzed using content analysis and then tabulated. The studies main recommendation is that South Africa adopts a real targeting approach in place of the current monetary policy of inflation targeting, while keeping inflation constant. The study further recommends South Africa impose capital controls, tighten the escape clause as well as implement a clear and coherent macroeconomic economic framework eliminating any contradiction between fiscal and monetary policy The study found that the current monetary policy of inflation targeting is inappropriate and argues that a more relaxed monetary policy is more appropriate to the economic and development challenges in South Africa