Interest Rate Pass-through and Monetary Policy in South Africa: Evidence from ARDL and FMLS Models

Smile Dube, Y. Zhou 
(Department of Economics, California State University Sacramento (CSUS), USA)

Abstract: This paper examines the degree of pass-through and adjustment speed of the prime rate in response to changes in the repo rate in South Africa for the period 1998M4-2011M1. Inflation targeting was adopted in February 2000 as the monetary goal for the South African Reserve Bank (SARB). The repo rate was adopted as the policy rate at the same time. We use the ARDL and FMLS estimators to test for cointegration over the whole sample period 1998M4-2011M1. We split the sample at the February 2000 date and repeat the estimates for each sample. For the pre-February 2000 sample, both the ARDL and FMLS, the degree of pass-through is complete. For the whole sample and the 2000M2-2011M1, the results are close to 1 ranging from 0.90 to 0.97. The error-correction models (short-run) estimates for the repo rate pass-through range from 0.85 to 0.92. The speed of adjustment ranges from -1.66 to -0.06. The pass-through coefficient in South Africa closely resembles those of middle-income to high-income countries. Overall, our results confirm that the monetary policy rate has more influence before 2000 and less so during the period when inflation-targeting was adopted as the main goal of the SARB. Our results are similar to Aziakpono et al. (2007) and De Angelis et al. (2005).

Key words: interest rate pass-through; monetary policy; incomplete pass-through; ARDL; FMLS

JEL codes: E43, F41, E52