MONETARY POLICY AND SPECULATIVE BUBBLES:
EVIDENCE FROM SOUTH AFRICA

 

Oswald K. Mungule
National Economic Advisory Council


Christopher Malikane
University of Witwatersrand

 

ABSTRACT

This study formulates a small macro-model of the South African economy in order to investigate the relative performance of optimal monetary policy rules that respond to speculative bubbles. The model consists of two nonlinear speculative bubbles: the stock price and the exchange rate bubbles. These speculative bubbles interact with the IS curve, the Phillips curve and asset prices. Our findings show that policy rules that respond to speculative bubbles perform better than rules that do not respond to bubbles, although this comes at higher welfare loss. This suggests that it may be prudent for the South African Reserve Bank to react to asset price bubbles in its interest rate setting.