^*Thomas Harjes is a senior economist in the IMF European Department and Luca Antonio Ricci is a deputy division chief in the IMF Research Department. The authors started this project when they were desk economists for South Africa. The authors are highly indebted to Andy Berg, Philippe Karam, and Douglas Laxton for sharing their programs and also thank Peter Gakunu, Manuela Goretti, Nikolay Gueorguiev, Alejandro Justiniano, Ondrej Kamenik, Daniel Leigh, Papa N'Diaye, Sean Nolan, Frank Schorfheide, Theo Van Rensburg, Werner Schule, and participants in the presentation at the South Africa Reserve Bank and in the IMF Small Modeling Group seminars for very helpful discussions and comments. The Bayesian estimation is programmed in Dynare, a software kindly provided by Michel Juillard and his team.

Abstract

This article estimates a small dynamic macroeconomic model for the South African economy with Bayesian methods. The model is tailored to assessing the impact of domestic as well as external shocks on inflation within an inflation-targeting framework, by incorporating forward-looking behavior of private agents and of the monetary authority. The model is able to display important empirical features of the monetary transmission mechanism that have been found in other studies. It helps to integrate the short-term inflation outlook into a consistent medium-term framework and to design the policy response for various shocks that affect inflation.