The study uses the asymmetric error correction model as in Scholnick (1996)
and two wholesale bank interest rates (prime interbank lending and the negotiable
certificate of deposit rates), to examine how market interest rates adjust to
changes in the SARB official rate under different policy regimes in South Africa.
The study covered the period between 1973 and 2004, which was divided into six
sub-periods to reflect the different monetary policy regimes in South Africa.
The results indicate a varying degree of adjustment under the different regimes,
but clearly show that there was greater speed of adjustment under regimes that
stress more market-oriented policies as opposed to control measures. The response
of market Interest rates to monetary policy was quick and with high magnitude
which suggest a fairly efficient money market. The evidence on the asymmetric
adjustment was weak. On the whole, the results of this study suggest that a
market-oriented policy would be more effective in transmitting the effects of
the Bank’s monetary policy stance to the rest of the economy.