Inflation+Targeting - SOUTH AFRICAN RESERVE BANK The...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
SOUTH AFRICAN RESERVE BANK SOUTH AFRICAN RESERVE BANK Objectives and importance of inflation targeting Why target inflation? The question that is often posed, not only in the South African context, is why target inflation rather than other variables such as employment or output? The Reserve Bank’s mandate is set out in the Constitution as protecting the value of the currency in the interest of balanced and sustainable economic growth.Thus price stability or low inflation, which protects the value of the currency, is not an end in itself. Apart from the fact that high inflation is gen- erally associated with poor economic performance, inflation has a number of other negative social and economic effects. Inflation has important implications for the redistribution of income and wealth.To the extent that inflation is unexpected, savers and people on fixed incomes will tend to suffer most, while borrowers will gain. Generally people can try and hedge against inflation, but it is usually the wealthy who are most able to protect themselves, for example by borrowing money to buy non-monetary assets.The wealthy often have assets that can more easily be protected against expected inflation. It is generally the case that the poor are most vulnerable to inflation. The ability of the working poor to protect themselves will depend on their wage-bargaining power. The non-working poor are dependent on the degree to which any social welfare benefits that they may be receiving are linked to inflation. It should also be noted that the current inflation has been driven primarily by higher food prices. As the poor have a higher weight for food in their consumption basket, the inflation rate facing the poor has been significantly higher than that of the higher income groups. Inflation also distorts the tax system, as most tax systems do not allow for inflation. Even if incomes rise with inflation, they often then move into a higher tax bracket.This results in dis- proportional increases in tax payments. Similarly, interest earned by taxpayers is treated as income, even though a large proportion of the interest receipts are supposed to compensate borrowers for the higher inflation, rather than being real income. Finally, inflation results in increased uncertainty which makes economic decision-making more difficult. High inflation is usually also accompanied by greater price variability.The con- fusing price signals make the price system less efficient, and the result is lower levels of investment and growth. This leads the Bank to believe that the best contribution that mone- tary policy can make to growth is to provide a low and stable inflation environment that is conducive to sustainable long-term growth. Why not target growth directly with monetary policy? It goes without saying that the target of
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.

Page1 / 2

Inflation+Targeting - SOUTH AFRICAN RESERVE BANK The...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online