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This book focuses on income inequality, output-inflation trade-off and economic policy uncertainty in South Africa. Tight monetary and macroprudential policies raise income inequality. Income inequality transmits monetary policy and macroprudential policy shocks to real economic activity. Economic policy uncertainty influences the dynamics in the lending rate margins, inflation expectations, credit, pass-through of the repo rate to bank lending rates and companies’ cash holdings. The trade-off between output and inflation and output growth persistence vary with inflation regimes. Stimulatory demand policy shocks are less effective in high inflation regime. High income inequality raises consumption inequality, which raises demand for credit, but price stability matters in this link. Increased bank concentration raises income inequality, lowers economic growth and employment rate. Elevated economic policy uncertainty lowers output growth, lowers capital formation, reduces credit and raises companies’ cash holdings. Increased companies’ cash holdings reduce capital formation and impact the transmission of expansionary monetary policy shocks to real economic activity. This book shows there is an inflation level within the target band below it which lowers income inequality, while raising GDP growth and employment. Thus price stability, economic policy uncertainty and income inequality matter for the efficient transmission of policy shocks.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

The South African economy has been growing at a slow pace since the onset of financial crisis in 2007. The economy experienced recessions in the 2009Q1–2009Q3 and 2018Q1–2018Q2 periods. The weak and volatile economic growtheconomic growth does not lead to high job creation. In addition, the subdued growth will not contribute in reducing high unemployment, high income inequality, and may exacerbates other socio-economic imbalances. Given this context the South African policymakers have pointed out in several occasions the need for structural reforms to grow the economy.

Eliphas Ndou, Thabo Mokoena

Income Inequality, GDP Growth and Inflation Regimes

Frontmatter

Chapter 2. Income Inequality and GDP Growth Nexus in South Africa: Does the 4.5% Consumer Price Inflation Threshold and Other Channels Play a Role?

Evidence indicates that positive income inequality shocks significantly lower GDP growth. Maintaining inflation below the 4.5 % threshold minimizes the adverse effects of positive income inequality shocks on GDP growth. In addition, evidence from the counterfactual analysis indicates the adverse effects of income inequality shocks on GDP growth are exacerbated by elevated economic policy uncertainty, depressed employment, weakening investment, especially residential and nonresidential investment. These findings imply the need for certainty in economic policy to avert exacerbating the adverse effects of positive income inequality shocks on GDP growth. Second, policymakers should implement policy initiatives that should reduce income inequality for a long time rather than transitorily.

Eliphas Ndou, Thabo Mokoena

Chapter 3. Does the Inflation Rate Below 4.5% Matter for the Distributional Effects of Positive Inflation Shocks on Income Inequality in South Africa?

Evidence reveals that income inequality growth declines to positive inflation shocks only when inflation is (1) below 3 % and (2) when it is below 4.5 % threshold level. In addition, employment growth rises significantly and reaches the bigger peak values when inflation is (1) below 3 % and (2) below 4.5 %. Despite, employment growth rising significantly when inflation is within the 3-6 % band or below 6 % threshold, the income inequality growth rises. In addition, evidence reveals that there is a threshold level within the existing inflation target band in which unexpected positive inflation impulses lead to rising GDP growth while reducing income inequality growth. This chapter concludes by examining the relevance of the inflation regime below the 4.5 % threshold in transmitting expansionary fiscal and monetary policy shocks to income inequality growth. The fiscal policy shocks include increased government consumption and income tax cut. The amplification effects by the inflation regime below 4.5 % threshold is bigger to personal income tax cut shocks, followed by government consumption shock. This implies expansionary fiscal policy tools can be used to lower income inequality and the reduction is amplified by inflation when it is below 4.5 % threshold.

Eliphas Ndou, Thabo Mokoena

Inequality and Monetary Policy

Frontmatter

Chapter 4. Does the Income Inequality Channel Impact the Transmission of Monetary Policy Shocks to Economic Activity?

Evidence from counterfactual analysis reveals that the income inequality channel accentuates the decline in real economic activity following contractionary monetary policy shocks. In addition, income inequality dampens the increases in marginal propensity to consume, employment growth, GDP growth and disposable income growth due to the expansionary monetary policy shocks. From a policy perspective, Monnin (2017) argues that income inequality matters in understanding and gauging the reaction of the economy to monetary policy impulses. Hence policymakers should take this dimension into account when designing and calibrating policies. This should happen despite income inequality not being depicted in the standard monetary policy transmission mechanism.

Eliphas Ndou, Thabo Mokoena

Chapter 5. Do Monetary Policy Shocks Influence Income Inequality Dynamics in South Africa?

Evidence indicates that income inequality declines due to expansionary monetary policy shocks and the declines are significantly bigger when inflation is below 4.5 %, when it is within 4.5–6 %, below 3 % than above 6 %. A counterfactual analysis reveals that actual income inequality growth declines more in the presence of employment growth, economic growth, and household disposable income growth channels, than when these channels are shut off. This indicates that increases in employment growth, disposable income growth and GDP growth, following an expansionary monetary policy shock, amplify the reductions in income inequality growth. Recent studies suggest that having a solid grasp of the ways that monetary policy decisions, income inequality, and aggregate economy, are intertwined is important for an efficient design and implementation of monetary policy.

Eliphas Ndou, Thabo Mokoena

Chapter 6. Does Trade Openness Impact the Link Between Monetary Policy and Both Income Inequality and Consumption Inequalities?

Evidence reveals that positive trade openness shock reduces both the income and consumption inequalities. Evidence from counterfactual VAR models which shut off the trade openness variables in transmitting contractionary monetary policy shocks to income inequality, reveals that the counterfactual income inequality growth rises more than the actual reaction. This suggests that trade openness channel dampens the rising income inequality due to contractionary monetary policy shock. The trade openness channel mitigates the increase in income inequality by nearly half of the peak increase, following contractionary monetary policy shock.

Eliphas Ndou, Thabo Mokoena

Chapter 7. Does Financial Globalisation Impact the Link Between Monetary Policy and Income Inequality?

The chapter applies a counterfactual analysis to show the role of net capital inflow channel in transmitting tight monetary policy shocks to growth of income inequality. We find that counterfactual growth of income inequality rises less than the actual responses. This evidence suggests that net capital inflow channels dampen the increase in income inequality, following a tight monetary policy shock. This may be indicative of the dominance of exchange rate appreciation and reduction in consumer price inflation in lowering income inequality. And not the reduction in economic growth, following tight monetary policy shocks. From policy perspective, this calls for optimal monetary response to consider the income inequality reaction in the calibration of monetary policy effects on the optimal net capital inflows to have a desirable effect from a social perspective.

Eliphas Ndou, Thabo Mokoena

The Role of the Monetary Policy Channel in Transmitting Shocks to Income Inequality

Frontmatter

Chapter 8. Does Monetary Policy Impact the Effects of Shares of Manufacturing Employment Shocks on Income Inequality?

Evidence reveals that unexpected increase in the manufacturing, tradeable, and mining sector employment shares, leads to significant reduction in income inequality. The reduction in income inequality, due to shocks from these sectors’ employment shares, is amplified by low inflationary environment (that is, the consumer price inflation below or equal to 6 %). In addition, the reduction in income inequality is further amplified by the low repo rate level when consumer price inflation is below the 6 % threshold. This evidence reveals that inflation regimes matter for expansionary monetary policy to influence the reduction in income inequality due to improved manufacturing sector employment share.

Eliphas Ndou, Thabo Mokoena

Chapter 9. Is There a Role for the Monetary Policy Channel in Transmitting Positive Shocks to the Services Sector Employment Shares to Income Inequality?

Evidence reveals that unexpected increase in the services sector employment shares leads to significant increase in income inequality. In addition, the counterfactual analysis reveals that the inflation below the 4.5 or 6 % threshold dampens the increase in income inequality from positive shocks to the services sector employment shares. Moreover, the counterfactual analysis reveals that high GDP growth, the repo rate, and exchange rate channels amplify the impact of positive shocks to the services sector employment shares onto income inequality.

Eliphas Ndou, Thabo Mokoena

Consumption Inequality and Income Inequality

Frontmatter

Chapter 10. Does the Consumption Inequality Channel Impact the Transmission of Positive Income Inequality Shocks to Credit Dynamics in South Africa? Insights Before 2009Q1

Evidence indicates that credit increases significantly due to positive income inequality shocks. The study further determines the role of consumption inequality and consumption growth channels using counterfactual VAR models in transmitting positive income inequality shocks to credit extension. The actual credit rises more than the counterfactual responses suggesting that consumption growth, consumption inequality and inequalities in consumption categories amplify the increase in credit due to the positive income inequality shocks. This implies that macroprudential regulators should put mechanisms in place which should prevent credit extension that is not driven by fundamentals as this may lead to crises and unproductive uses.

Eliphas Ndou, Thabo Mokoena

Chapter 11. Does Price Stability Impact the Link Between Income Inequality and Consumption Inequality?

Evidence reveals that consumption inequality rises significantly to positive income inequality shocks. A counterfactual VAR analysis indicates that high inflation amplifies the increase in consumption inequality to positive income inequality shocks when inflation exceeds the 6 % threshold. In addition, evidence reveals that low inflation dampens the increase in consumption inequality when inflation is below the 6 % threshold. This evidence reveals that price stability matters. Therefore, policymakers should enforce price stability to weaken the link between the income inequality and consumption inequality.

Eliphas Ndou, Thabo Mokoena

Macroprudential Policy and Income Inequality

Frontmatter

Chapter 12. Do Positive Excess Capital Adequacy Ratio Shocks Influence the Income Inequality Dynamics in South Africa?

Evidence reveals that a positive excess CAR shock raises income inequality growth. Evidence from counterfactual analysis indicates that the actual decline in credit and GDP growth due to positive excess CAR shock exceeds those of the counterfactual responses. This suggests that increased income inequality growth following the positive excess CAR shocks exacerbates the decline in the real economic activity. From policy perspective, Perugini et. al (2015) suggests that policymakers should cast their nets wider than financial regulatory reforms and consider the effects of their policy changes on influencing the distributive patterns, which include income inequality.

Eliphas Ndou, Thabo Mokoena

Chapter 13. Does an Unexpected Loosening in the Loan to Value Ratio Has Any Distributive Effects via the Inequality Channel?

Evidence indicates that an unexpected loosening in the loan to value ratio (LTV) shock reduces income inequality growth significantly. In addition, evidence from the counterfactual VAR approach analysis shows declining income inequality amplify the increase in house price growth, residential investment growth and credit growth due to LTV shocks. Since income inequality channel is a potent transmitter of loose LTV shocks to the real economic activity, hence policymakers should decisively eliminate the high levels of income inequality as these distort the transmission mechanism of macroprudential policies.

Eliphas Ndou, Thabo Mokoena

Chapter 14. Is the Tightening in the National Credit Act a Driver of Growth of Income Inequality?

Evidence reveals that the NCA raises income inequality. Evidence from counterfactual approaches shows that the rise of growth of income inequality due tightening NCA shock exacerbates the decline in credit growth, residential investment growth and GDP growth. This evidence shows that the income inequality channel is a potent conduit that transmits the NCA shocks.

Eliphas Ndou, Thabo Mokoena

Chapter 15. Can an Unexpected Loosening in the Labour Market Reforms Reduce the Growth of Income Inequality in South Africa?

Evidence indicates that an unexpected loosening in the labour market reforms reduces income inequality growth when complemented by increased government consumption expenditure, income tax cuts, low economic policy uncertainty and inflation below 6 % and not by a weak exchange rate regime. A weak exchange rate mitigates the reduction in the income inequality growth induced by an unexpected loosening in the labour market reforms. In addition, evidence suggests that the declining consumer price inflation and the improvement in economic growth, the increased employment growth, and the declining unemployment rate, following an unexpected loosening in labour market reforms, amplifies the decline in income inequality growth to an unexpected loosening in labour market reforms.

Eliphas Ndou, Thabo Mokoena

Bank Concentration, Income Inequality and Other Channels

Frontmatter

Chapter 16. Does the Increase in Banking Concentration Impact Income Inequality in South Africa?

Evidence reveals that income inequality rises significantly to a positive bank concentration shock. The counterfactual analysis reveals that the increase in income inequality to positive bank concentration shocks is amplified by the decline in both credit and GDP, as well as rising unemployment. Therefore, bank concentration should be reduced to lower income inequality via the indicated channels.

Eliphas Ndou, Thabo Mokoena

Chapter 17. Do Positive Bank Concentration Shocks Impact Economic Growth in South Africa?

Evidence shows that GDP declines to positive bank concentration shocks. In addition, evidence from the counterfactual analysis shows that actual GDP declines more than the counterfactual suggests. The decline is accentuated by the slowdown in investment, reduction in employment, increased unemployment and reduced credit growth due to the unexpected increase in bank concentration. Therefore, it is important for policymakers to lower the entry barriers and introduce a sliding scale of capital adequacy ratios that rise with the size of the banks.

Eliphas Ndou, Thabo Mokoena

Chapter 18. Do Positive Bank Concentration Shocks Impact Employment in South Africa?

Evidence reveals that employment declines significantly to positive bank concentration shocks and the declines are much bigger to persistently rising shocks than to less persistent shocks. In addition, the counterfactual analysis reveals that the actual employment declines more than the counterfactual suggests. This indicates that the declining credit extension and reduced capital formation amplifies the reduction in employment. Policymakers should reduce the degree of the banking concentration and make the banking system competitive by lowering the entry barriers and by introducing a sliding scale of capital adequacy ratios that rise with the size of the banks.

Eliphas Ndou, Thabo Mokoena

Output-Inflation Trade-Off and the Role of Inflation Regimes

Frontmatter

Chapter 19. Is There Evidence of the Trade-Off in Output and Inflation Volatilities in South Africa?

Evidence shows there is trade-off between output and inflation volatilities. The volatilities of inflation and the output were minimised in the inflation-targeting period. Evidence reveals that periods when the macroeconomic performance was superior coincided with the periods of minimal volatilities in both the inflation rates and the output gap.

Eliphas Ndou, Thabo Mokoena

Chapter 20. To What Extent Does the Output-Inflation Trade-Off Exist in South Africa and Is It Impacted by the Six Per Cent Inflation Threshold?

The chapter determines the extent to which elevated nominal volatilities make expansionary policy ineffective in achieving maximum real output and low inflation. Evidence shows that elevated nominal demand and inflation volatility shocks reduce the output-inflation trade-off, and this reduces policy effectiveness in achieving desirable outcomes. The magnitudes of the reduction in the output-inflation trade-off effects are larger in the high inflation regime than in the low inflation regime. In policy terms, this evidence confirms the new Keynesian hypothesis, which implies that demand policy is less effective in countries with both high inflation and demand volatilities. Therefore, policymakers should minimize the volatility of inflation when implementing demand management policy and ensure that price stability is enforced to minimize inflation volatility.

Eliphas Ndou, Thabo Mokoena

Chapter 21. Do Inflation Regimesinflation regimes Affect the Transmission of Positive Nominal Demand Shocksnominal demand shock to the Consumer Price Level?

Evidence reveals that real output rises much higher in the low inflation regime than in the high inflation regime. Thus, a nominal demand policy shock affecting aggregate demand will have a bigger effect on real output in the low inflation regime than in the high inflation regime. We find that inflation rises and fluctuates much higher in the high inflation regime than in the low inflation regime, following a nominal demand shock. Evidence confirms the new Keynesian hypothesis, which implies that a demand policy is less effective in countries with high trend inflation and where prices are less rigid.

Eliphas Ndou, Thabo Mokoena

Chapter 22. Do Positive Nominal Volatility Shockspositive nominal volatility shocks Reduce the Output-Inflation Trade-OffOutput-inflation trade-off and Is There a Role for Inflation Regimesinflation regimes?

The chapter determines the extent to which elevated nominal volatilities make expansionary policy ineffective in achieving maximum real output and low inflation. Evidence shows that elevated nominal demand and inflation volatility shocks reduce the output-inflation trade-off and this reduces policy effectiveness in achieving desirable outcomes. The magnitudes of the reduction in the output-inflation trade-off effects are larger in the high inflation regime than in the low regime. In addition, a combination of increases in both inflation and nominal demand volatilities is bad for the output-inflation trade-off. Therefore, policymakers should minimize these volatilities when implementing demand policies and ensure that price stability is enforced to minimize inflation volatility.

Eliphas Ndou, Thabo Mokoena

Output Growth Persistence and Inflation

Frontmatter

Chapter 23. Does the Persistence of Output Growth Depend on Inflation Regimes?

Evidence reveals that the sizes of output persistence measures are smaller when inflation is above the 6 % threshold relative to when inflation is less or equal to 6 %. We also determine whether the average frequency of price changes based on Kiley (2000) differs between the high inflation regime and the low regimes. Evidence shows that the average frequency of price changes is relatively shorter in the high inflation regime than in the low regime. Evidence shows that increased price flexibility in the high inflation regime weakens the responses of household consumption growth to an expansionary monetary policy shock. However, the reduced price flexibility in the low inflation regime magnifies the household consumption growth increase due to expansionary monetary policy shocks. From a policy perspective, this implies that an expansionary monetary policy shock, when inflation is below 6 %, will stimulate household consumption growth more than raising the inflation rate because prices are less flexible.

Eliphas Ndou, Thabo Mokoena

Chapter 24. Do the Effects of Expansionary Monetary Policy Shocks on Output Persistence Depend on Inflation Regimes?

Evidence shows that expansionary monetary policy shocks raise output persistence more when inflation is below or equal to 6 % than when it is above 6 %. Output persistence rises more to a scenario of successive policy rate cuts of varying magnitude than a constant policy rate change scenario. The findings indicate that low economic policy uncertainty magnifies the output persistence response to expansionary monetary policy shocks. By contrast, high economic policy uncertainty lowers the output persistence response to an expansionary monetary policy shock. In policy terms, this implies that a larger expansionary monetary policy shock than expected will raise output persistence significantly and the amplification effects will be enlarged when inflation is in the low inflation regime.

Eliphas Ndou, Thabo Mokoena

Chapter 25. Output and Policy Ineffectiveness Proposition: A Perspective from Single Regression Equations

Evidence shows that the impact of a one percentage point increase in nominal GDP growth on real GDP growth is larger in the low inflation regime than in the high inflation regime. In addition, evidence from the logistic smooth transition autoregression model indicates that the optimal inflation threshold values are around 4.4–4.57 % and these values are within the current 3–6 % inflation band. This evidence suggests that price stability matters for the size of the impact of a positive nominal demand shock (such as expansionary monetary policy shocks) on real GDP growth based on the 6% inflation threshold. Therefore, there is a high likelihood that expansionary monetary policy shocks in the low inflation regime will raise real GDP growth more than in the high inflation regime.

Eliphas Ndou, Thabo Mokoena

Economic Policy Uncertainty, Expansionary Monetary Policy and Fiscal Policy Multipliers

Frontmatter

Chapter 26. Does the Economic Policy Uncertainty Channel Impact the Influence of Expansionary Monetary Policy Changes on Output Dynamics?

Evidence shows that an elevated economic policy uncertainty shock slows down economic growth, which is consistent with the real option theory. In addition, evidence shows that low economic policy uncertainty amplifies the economic growth reaction to an unexpected cut in the repo rate. By contrast, the actual economic growth rises less than the counterfactual responses in the high economic policy uncertainty regime. From policy perspective, policymakers anticipating a certain magnitude of the impact from stimulatory policy shock should consider economic policy uncertainty regimes in their policy decisions; otherwise policy effects may fall short of their expectations and induce more uncertainty.

Eliphas Ndou, Thabo Mokoena

Chapter 27. How Does Inflation Impact the Effects of Expansionary Monetary Policy and Fiscal Policies on Real GDP Growth?

Evidence indicates the magnitudes of the multiplier effects of expansionary monetary and fiscal policies on output are bigger in the low inflation environment and low economic policy uncertainty regime than in the high inflation regime. The high trend inflation and elevated economic policy uncertainty dampen the multiplier effects of expansionary policies. Therefore low inflation and low economic policy uncertainty environments are needed to propagate the stimulatory effects of expansionary policies on GDP growth.

Eliphas Ndou, Thabo Mokoena

Chapter 28. The Time-Varying Pass-Through of the Lending Rate Responses to the Repo Rate Changes and Loan Intermediation Mark-Ups

We find that the interest rate pass-through and the loan intermediation mark-up move in opposite directions. A high (low) mark-up is accompanied by a low (high) interest rate pass-through. The interest rate pass-through coefficient is higher pre-2009M1 and the mark-up is lower pre-2009 compared to other samples. The reduced interest rate pass-through and higher loan intermediation mark-up post-2009 might indicate the role of the risk premium attached to weak and low economic growth and the accompanying instabilities during this period. In addition, the results show that the size of the interest rate pass-through and loan intermediation mark-up differs across the monetary policy tightening and loosening cycles.

Eliphas Ndou, Thabo Mokoena

Chapter 29. Do Economic Policy Uncertainty Shocks Impact the Bank Lending Rate Margins?

Evidence indicates that positive economic policy uncertainty shocks raise bank lending rate margins. By contrast, the negative economic policy uncertainty shock lowers bank lending rate margins. The counterfactual VAR evidence shows that inflation below 6 % dampens the actual rise in the bank lending rate margins following positive economic policy uncertainty shocks. Thus policymakers should consider that, a large reduction in the repo rate than expected is needed to overcome the mitigating effects of elevated economic policy uncertainty in raising the bank lending rate margins even in a low inflation environment.

Eliphas Ndou, Thabo Mokoena

Chapter 30. Does Economic Policy Uncertainty Impact the Pass-Through of the Repo Rate to the Bank Lending Rates?

Evidence shows that economic policy uncertainty (EPU) shocks directly impact the lending rate dynamics and the effects differ, depending on the persistence of the economic policy uncertainty shock. The persistently rising (declining) EPU shock leads to persistent increase (decrease) in the lending rates. This finding implies that the persistence of the EPU shocks matters for the evolution of the lending rates. In addition, evidence shows that the actual rise in lending rate exceeds the counterfactual due to the repo rate tightening shocks, when the elevated EPU channel is operational in the model. This suggests that the elevated EPU amplifies the increase in the lending rate to positive repo rate shock. By contrast, the negative EPU channel dampens the increases in lending rate to positive repo rate shocks.

Eliphas Ndou, Thabo Mokoena

Economic Policy Uncertainty and the Lending Rates, Credit and Corporate Cash Holding Channels

Frontmatter

Chapter 31. Are Credit Growth Reactions to Expansionary Monetary Policy Shocks Weakened by Heightened Economic Policy Uncertainty?

Evidence indicates that positive (negative) economic policy uncertainty shocks lower (raise) credit extension and tighten (loosen) credit conditions. Evidence shows that expansionary monetary policy shocks lead to bigger increases in credit growth in the low economic policy uncertainty regime through amplifications from loosening credit conditions index. The findings show that elevated economic policy uncertainty directly weakens the transmission of the effects of expansionary monetary policy shocks onto credit growth. Thus economic policy uncertainty regimes matter for the efficacy of the credit conditions channel in transmitting expansionary monetary policy shocks to credit growth. Hence a large reduction in the policy rate by more than expected may be required to achieve a similar impact and this may lead to extensive loosening in the credit conditions.

Eliphas Ndou, Thabo Mokoena

Chapter 32. Do Companies’ Cash Holdings Impact the Transmission of Economic Policy Uncertainty Shocks to Capital Formation?

Evidence shows that positive (negative) economic policy uncertainty raises (reduces) growth of companies’ deposits. Increases in the growth of companies’ deposits accentuate the decline in capital formation following a positive economic policy uncertainty shock. The decline is large when inflation exceeds the 6 % threshold than below this limit. The reduction in the growth of companies’ deposits in the low inflation regime amplifies the increase in capital formation following a negative economic policy uncertainty shock. From a policy perspective, price stability matters as the low inflation environment makes the growth of companies’ deposits to cushion the decline in the capital formation growth due to positive economic policy uncertainty shocks.

Eliphas Ndou, Thabo Mokoena

Chapter 33. Does an Increase in the Value of Companies’ Cash Holdings Impact the Transmission of Expansionary Monetary Policy Shocks? Counterfactual Policy Analysis

Evidence indicates that expansionary monetary policy shocks raise credit growth more than the counterfactual suggests in the low economic policy uncertainty regime. This suggests that, in the low economic policy uncertainty environment, the slowdown in the companies’ deposits growth due to an expansionary monetary policy shock amplifies the increases in the credit growth. By contrast, an expansionary monetary policy shock raises credit growth less than the counterfactual in the high uncertainty regime. This is due to an increase in the growth of companies’ deposits in the high uncertainty regime, which dampens credit growth. The multiplier mechanism in the credit creation based on deposits is weakened in the high economic policy uncertainty periods and this weakens the stimulatory effects of expansionary monetary policy shocks.

Eliphas Ndou, Thabo Mokoena

Chapter 34. Does an Unexpected Reduction in Economic Policy Uncertainty Impact Inflation Expectations?

Evidence indicates that an unexpected reduction in the economic policy uncertainty lowers inflation expectations. We perform a counterfactual analysis to determine what would have happened to inflation expectations when the exchange rate, economic growth and consumer price inflation channels are shut off in transmitting unexpected reduction in economic policy uncertainty. The actual inflation expectations decline more than the counterfactual reaction. This suggests that an exchange rate appreciation and reduction in the consumer price inflation, following an unexpected reduction in the economic policy uncertainty, lead to further reduction in the inflation expectations. This suggests that an unexpected reduction in the economic policy uncertainty directly lowers inflation expectations and may lead to anchoring of inflation expectations.

Eliphas Ndou, Thabo Mokoena

Backmatter

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