Full employment target approach and price stability: should the South African Reserve Bank adopt a dual mandate?

Abstract

The primary objective under Section 224. (1) of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic. This report argues that the SARB should adopt this approach because of the high levels of unemployment in South Africa of 30.8 percent which is the highest among middle income countries. This report seeks to explore whether the SARB can adopt a dual mandate –employment target and price stability. The methodology carried out in the report will be a survey of the literature. The report uses the political economy model approach of Heintz and Pollin which examines linkages between growth, employment, poverty reduction by so doing providing a foundation for policy discussions around monetary policy and inflation management. This approach draws on examples, research and statistics from a wide range of countries that have been adopted in this report. This report will contribute to the debate around the amendment or expansion of the SARB mandate to include employment and economic growth by providing examples and statistics from a wide range of countries and highlight the importance of targeting real variables and set it apart from the debate around the SARB’s ownership and independence. This report will also help guide macroeconomic policy recommendations in South Africa. It is argued the SARB cannot and should not ignore the well-being of citizens in the quest of attaining price stability and thus adopting a dual mandate is the recommendation put forward in this report and the adoption of a dual mandate can be made without negatively impacting the SARB’s credibility if they were to be open and communicate clearly with the public and set targets that they will work gradually to achieving and this will eliminate the time inconsistency problem and reduce political pressure on the bank