IMF Working Papers

Monetary Policy, Inflation, and Distributional Impact: South Africa’s Case

Author/Editor:

Ken Miyajima

Publication Date:

March 19, 2021

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

The South African Reserve Bank has continued to fulfill its constitutional mandate to protect the value of the local currency by keeping inflation low and steady. This paper provides evidence that monetary policy tightening aimed at maintaining low and stable inflation could at the same time reduce consumption inequality over a 12–18 month horizon, commonly understood as the transmission lag of monetary policy action to the real economy, and similar to the distance between survey waves used in the analysis. In response to “exogenous” monetary policy tightening, the real consumption of individuals at lower ends of the consumption distribution declines relatively modestly, or even increases. With greater reliance on government transfers, thus smaller reliance on labor income, and relatively larger food consumption, these individuals appear to benefit mainly from lower inflation. By contrast, the real consumption of individuals at higher ends of the consumption distribution is more likely to decline due to lower labor income, weaker asset price performance, and higher debt service cost.

Series:

Working Paper No. 2021/078

Subject:

Central bank policy rate Consumption Economic sectors Financial crises Financial services Household consumption Income inequality Inflation National accounts Prices

Frequency:

regular