Our Research posts are about the latest academic research being done in the School of Economics. This week:
Political Independence of the South African Reserve Bank: Managing Interest Rates
by Prof. E.P.J. Kleynhans & Ryan Meintjes
This study ascertained whether the South African Reserve Bank (SARB) is politically independent and able to operate without undue external influence. South Africa’s Constitution states that the SARB must act independently and without fear, favour or prejudice. However, the SARB is under increasing pressure from government and the trade unions to shift its monetary policy stance in order to boost the country’s competitiveness. Whether these external demands have actually compromised its independence at times has been the subject of debate. If the SARB is indeed succumbing to external influence, it could mean that monetary policy in South Africa is leaning too heavily in the direction of short-term growth while inflationary pressures loom.
The study comprised a literature review, and econometric analysis of the Bank’s independence. Movements in interest rates were used as an indicator of dependence.
The analysis comprised two models: the first model investigated actual interest rates in South Africa over the past two decades, and how interest rates typically respond to a series of economic indicators; the second model prescribed what interest rates should have been during the period in question, with reference to Taylor’s Rule. The differences between the two sets of rates were assumed to expose shortcomings in the direction of South Africa’s monetary policy and therefore some sort of external influence or dependence.
The results obtained showed that there is almost no level of dependence. Interestingly, these findings come amidst continuous threats to the SARB’s independence. The notion of Reserve Bank independence underlying this study is not unconditional independence from government, but rather independence to pursue the SARB’s constitutional objective of price stability, even at the expense of other objectives that are more important to the political authorities. One must, however, also bear in mind that although external pressure may place the Reserve Bank’s independence in jeopardy, there could be some value in these external parties’ objectives or requests.
To be published in the Journal Acta Commercii vol. 13(2) of 2013. (http://www.actacommercii.co.za/index.php/acta/index )