Isolating a measure of inflation expectations for the South African financial market using forward interest rates

Stellenbosch Working Paper Series No. WP09/2009
 
Publication date: 2009
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

The inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa and offers an additional method, which is market based. The methodologies of Nelson and Siegel (1987) and Svensson (1994) are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market’s inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.

 
JEL Classification:

E43, E44, E52, E58

Keywords:

South Africa, Inflation expectations, Monetary policy transmission mechanism, Implied forward rates, Term structure of interest rates

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1 March 2021
Even with the release of data showing a record high unemployment rate in 2020Q4, it turned out to be a fairly good week for the SA economy. Daily new COVID-19 infections remained well contained, while the second batch of 80 000 J&J vaccines arrived (albeit controversially with the grounded SAA being the carrier). In addition, relative to the October...

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