A Study On The Monetary Policy Frameworks In MEFMI Countries And South Africa

By Idah. K. Karadzandima
2012
The study reviews the monetary policy frameworks in MEFMI countries to ascertain their performance in achieving the primary of objective of price stability. The study finds out that MEFMI countries that are currently implementing exchange rate targeting, particularly under the CMA arrangement have performed fairly well as compared to the monetary targeting countries. This is despite the fact that monetary targeting is still the predominant monetary policy framework in MEFMI countries.
IT, a more recent framework implemented, only by Uganda among the MEFMI countries since July 2011, has had a remarkable record of success in countries that have implemented the framework. It arouses interest among policy makers in MEFMI countries whether this strategy is the benchmark of best practice. Individual circumstances, such as the degree of openness of the economy, the extent of fiscal discipline and the level of financial development are important for the choice of a nominal anchor. Consequently, some MEFMI countries such as Mozambique and Zimbabwe, which trade a lot with South Africa, could consider gradually moving towards the monetary union.
The study also assesses the effectiveness of monetary policy in achieving price stability. The paper examined the impact of an exogenous and temporary shock to short term interest rate using VAR impulse response analysis on price level and other macroeconomic variables, which include exchange rate and real GDP. The study focuses on South Africa, as a model for inflation targeting and 2 MEFMI countries – Uganda and Botswana. The results show that by targeting interest rates South Africa and Uganda are able to influence price, whilst the dependence on interest rates to address inflationary pressures for Botswana is misguided.