Structural estimates of the South African sacrifice ratio

Abstract

AbstractThis paper estimates the output cost of fighting inflation—the sacrifice ratio—for the South African economy using quarterly data spanning the period 1998:1–2019:3. To compute the sacrifice ratio, the structural vector autoregressive (SVAR) model developed by Cecchetti and Rich (Citation2001) based on Cecchetti (Citation1994) is employed. Our findings show us a small sacrifice ratio, which lies within the range 0.00002–0.231 percent with an average of 0.031 percent, indicating a low level of output to be sacrificed while fighting inflation. Hence, the reserve bank is recommended to sustain an inflation rate within the target range and reap the benefits of a predictable and stable price path, as restrictive monetary policy has only a transitory effect on real variables like output.Keywords: inflation targetingoutputsacrifice ratioSouth Africastructural VAR modelJEL CLASSIFICATION: E32E52 Additional informationFundingUnited Nations Uiversity World Institute for Development Economics Research.