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January 23, 20260 citationsOpen Access

Why Higher Trend Inflation Makes Monetary Policy More Costly in South Africa

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HHHylton HollanderCJClinton Joel

Key Points

  • This paper investigates how trend inflation affects monetary policy costs in South Africa.
  • Examined the relationship between trend inflation and monetary policy
  • Analyzed fiscal dynamic stochastic general equilibrium (DSGE) model implications
  • Discussed challenges of setting inflation targets in South Africa
  • Higher trend inflation increases the costs associated with monetary policy.
  • Lower trend inflation leads to more effective and less costly monetary policy implementation.
  • The shift from a 3-6% to a 3% inflation target band highlights the practical implications.

Abstract

Most inflation-targeting central banks target a small but positive underlying rate of inflation, often called trend inflation1. Yet its appropriate level remains uncertain. The extended deliberation in South Africa to move from a 3 - 6% target band to a 3% point target (with a ±1% tolerance band) illustrates this tension. In our working paper (Trend Inflation and the Costs of Price Dispersion in a Fiscal DSGE Model), we examine the role of trend inflation in an economy and argue that, all else equal, lower trend inflation is better for the economy.

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Cite This Study

Hollander et al. (2026) studied this question.

synapsesocial.com/papers/69730f18c8125b09b0d1ed59https://doi.org/10.71587/za1fge30
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