ZONE-TARGETING MONETARY POLICY PREFERENCES AND FINANCIAL MARKET CONDITIONS: A FLEXIBLE NON-LINEAR POLICY REACTION FUNCTION OF THE SARB MONETARY POLICY

We estimate a flexible model of the monetary policy reaction function of the South African Reserve Bank based on a representation of the policymaker's preferences that capture asymmetries and zone-targeting behaviours. We augment the analysis to allow for responses to financial market conditions over and above inflation and output stabilisation to address the current debate on the importance of financial asset prices in monetary policy decision making. The empirical results show that the monetary authorities' response to inflation is zone symmetric. Secondly, the monetary authorities' response to output is asymmetric with increased reaction during business cycle downturns relative to upturns. Thirdly, the monetary authorities pay close attention to the financial conditions index by placing an equal weight on financial market booms and recessions.