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This paper presents further empirical support for the finding that the impact of inflation and that of policy instruments to manage inflation are not distributed equally across households of different income groups. In particular, the evidence using South African data suggests that monetary policy tightening, which seeks to maintain low and stable inflation, has a relatively modest effect on real consumption of poorer households, who tend to rely on government grants and spend larger shares of income on food stuff, while the reduction in real consumption of wealthier households is much larger. This may be due to the fact that low and stable inflation help maintain the value of government grants and cap food prices both in real terms, and higher interest rates reduce labour income, weaken asset price performance and increase debt service cost. [ABSTRACT FROM AUTHOR]

Forecasts of agents who are actively involved in the setting of prices and wages are less readily available than those of professional analysts but may be more relevant for understanding inflation dynamics. Here we compare inflation expectations anchoring between analysts, businesses and trade unions for one country for which comparable forecasts are available for almost two decades: South Africa. Forecasts are modelled as monotonically diverging from an estimated long-run anchor point, or 'implicit anchor', towards actual inflation as the forecast horizon shortens. We find that the estimated inflation anchors of analysts lie within the 3–6 percent inflation target range of the central bank. However, those for businesses and trade unions, which our evidence suggests may be the most relevant for driving the inflation process, have remained above the top end of the official target range. Our results point to challenges for central banks seeking to gain credibility with agents whose decisions directly influence inflation. [ABSTRACT FROM AUTHOR]

We study optimized Taylor rules that incorporate financial stability considerations, which have been little analysed for emerging market economies. Setting the policy interest rate with a greater financial stability consideration reduces monetary policy effectiveness: a greater effort to reduce output volatility in the nontradables sector, where asset bubbles are prone to build, leads to greater inflation volatility. [ABSTRACT FROM AUTHOR]

We study optimized Taylor rules with the appropriate lag structure, which has been little done for emerging market economies. Setting the policy interest rate in response to movements in domestic long-term bond yields, in addition to the output gap, the inflation gap and the exchange rate, can make monetary policy more effective. But a more complex rule can reduce monetary policy effectiveness, notably in the presence of uncertainty about the effects of capital flows on domestic monetary conditions. [ABSTRACT FROM AUTHOR]

To assess Namibia's external competitiveness, this study estimates the country's equilibrium real exchange rate using the autoregressive distributed lag modelling approach that has superior small-sample properties. The nominal depreciation of the Namibia dollar in 2002 created historically one of the largest deviations in the real exchange rate from its equilibrium level, but deviations are small at present. The half-life of deviations from equilibrium is found to be about 1 year. [ABSTRACT FROM AUTHOR]