This study empirically examines the influence of shocks in the US federal funds rate on the Republic of South Africa’s output gap, consumer prices, 91-day T Bill rate and the Rand - US Dollar exchange rate from the first quarter of 1981 to the last quarter of 2014 with the use of a structural vector autoregressive (SVAR) model. Shocks in the US federal funds rate are found to have more of an impact on the South African inflation rate relative to other domestic macro variables. Domestic developments were found to play the most significant role in explaining the fluctuations of South Africa’s macro-variables. In light of the SARB’s inflation targeting monetary policy regime, it is recommended that it remains mindful of domestic developments as well as movements in the US federal funds rate in order to determine their upside risks to inflation before deciding on a policy stance.
KeywordsUS Federal Funds RateSouth AfricaSVARImpulse ResponseVariance Decomposition
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