Original Research

The price puzzle and the role of South African monetary policy in Botswana and Namibia

Philippe Burger, Helvi Fillipus, Innocent Molalapata
Journal of Economic and Financial Sciences | Vol 5, No 1 | a313 | DOI: https://doi.org/10.4102/jef.v5i1.313 | © 2018 Philippe Burger | This work is licensed under CC Attribution 4.0
Submitted: 28 June 2018 | Published: 30 April 2012

About the author(s)

Philippe Burger, Department of Economics, University of the Free State, South Africa
Helvi Fillipus, Department of Economics, University of the Free State, South Africa
Innocent Molalapata, Department of Economics, University of the Free State, South Africa

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Abstract

Using SVAR analysis, this paper finds what Sims calls a ‘price puzzle’, i.e. a case where CPI increases after a positive interest rate shock. The SVAR analysis controls for various monetary transmission mechanisms, including one based on the South African dominance hypothesis that links South African monetary policy to inflation in Botswana and Namibia. The paper follows Castelnuovo and Surico and interprets the price puzzle as a symptom of an indeterminate monetary policy. Subsequently the paper explores the finding of indeterminate monetary policy further by using an unstructured VAR to estimate the monetary reaction functions of Botswana and Namibia. These results also point to the presence of an indeterminate monetary policy. Lastly, both the SVAR and the unstructured VAR estimated for the monetary reaction function indicate the importance of the exchange rate, and not the interest rate, as a determinant of inflation in both Botswana and Namibia

Keywords

price puzzle; determinate and indeterminate monetary policy; monetary transmission mechanisms

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