- Title
- The term structure of interest rate and expected inflation in South Africa
- Creator
- Deve, Richard
- Subject
- Inflation (Finance)
- Subject
- Rational expectations (Economic theory)|
- Subject
- Inflation (Finance) -- Mathematical models
- Date Issued
- 2021-02
- Date
- 2021-02
- Type
- Doctoral theses
- Type
- text
- Identifier
- http://hdl.handle.net/10353/20252
- Identifier
- vital:45639
- Description
- One of the questions in the minds of policy-makers, monetary authorities and the government is the nature of South Africa’s yield curve and its ability to predict inflation expectations for this country. This calls for an investigation of the relationship between the term structure of interest rates and expected inflation in South Africa. The study seeks to provide answers to three sequentially structured questions: Is there a long-term relationship between the yield curve and inflation expectations in South Africa? Does interest rate term structure contain information about future inflation movements in an inflation-targeting regime for South Africa? And finally: How useful is the yield spread as a predictor for future inflation in South Africa? To shed light on these questions, monthly data for five core variables covering the period January 2000 to January 2017 was used. In South Africa, a tight monetary policy stance affects economic activity positively. The development of sounder bond markets in developed economies, which enhance economic development, creates predictable monetary policy direction relative to developing economies that are cha-racterised by unstable economic conditions coupled with policy inconsistence. This phenomenon results in less credible central banks, and hence leads to less anchored inflation expectations. However, South Africa has well-anchored inflation expectations and one of the most liquid bond markets in the world, which sets it in an excellent position to compete with developed economies. South Africa’s risk premium and inflation are less volatile than those of other developing countries. This particular study finds that a tight monetary policy stance results in an increase in short-term interest rates, leading consequently to a decline in future inflation expectations, and hence leading to a decrease in long-term interest rates, through which the credibility of the central bank is recognised. The positive marginal effect of the yield spread on inflation expectations suggests that the inflation expectation changes are influenced positively by changes in the yield spread. An observed long-run relationship exists between inflation expectations and the yield spread signals that the yield spread has predictive ability for inflation ex-pectations in South Africa. The forecast inflation mimics realised inflation, which could suggest that the forecast is fairly accurate and valuable in explaining the influence of the inflation targeting regime adopted by the South African Reserve Bank (SARB). On the other hand, inflation expectations are viewed as a lagging indicator. In this line of argument, Mishkin (1990b) mentions that past studies have used the yield curve to extract information about future inflation. This is in line with the findings of the SARB (2016). That study (2016) found that the yield spread is useful for predicting expected future yield over 24 quarters in the South African economy. The study found that the yield curve does have a predictive ability with regard to expected inflation, which is moderate. However, it was found that the repo rate and the current levels of inflation had more predictive power than the yield curve.
- Description
- Thesis (DPhil) -- Faculty of Management and Commerce, 2021
- Format
- computer
- Format
- online resource
- Format
- application/pdf
- Format
- 1 online resource (283 pages)
- Format
- Publisher
- University of Fort Hare
- Publisher
- Faculty of Management and Commerce
- Language
- English
- Rights
- University of Fort Hare
- Rights
- All Rights Reserved
- Rights
- Open Access
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UFH Department of Economics
| Thumbnail | File | Description | Size | Format | |||
|---|---|---|---|---|---|---|---|
| View Details Download | SOURCE1 | Deve R 200509103 Economics.pdf | 2 MB | Adobe Acrobat PDF | View Details Download |