Inflation aiming is considered a macroeconomic subject of treatment associating to the prevailing markets in a state. Inflation aiming can besides be better described as a survey that aims to accomplish monetary value stableness. Furthermore, one of the cardinal aims of the pecuniary policy in South Africa is monetary value stableness in the long-run.
Assorted indexs are used in surveies to mensurate monetary value stableness in assorted states worldwide. In South Africa these indexs are collected by the SARB ( South African Reserve Bank ) . To accomplish monetary value stableness, the assorted indexs have to be monitored, such as recognition extension and aggregative demand. For the intent of this paper trade good and consumer monetary values will be analysed as such indexs to qualify the importance thereof.
As mentioned already, trade good and consumer monetary values will be analysed to better understand rising prices aiming as a construct. Economists besides by and large refer to trade goods as merchandises with an about absolutely competitory supply. ( This is besides true for the agricultural sector. ) This means that no person or house could act upon the given monetary value and therefore consumers are besides considered as monetary value takers. Note that trade good monetary value alterations may impact the production cost of manufactured goods which, in bend, would take to rising prices.
Inflation could be broken down into downward or upward features of inflationary force per unit area. Increases in trade good monetary values may nevertheless increase the net incomes of exporters which would do demand to increase as a consequence of greater net incomes. Such an addition may so besides set upward force per unit area on the monetary value degree. It must besides be kept in head that in South Africa trade goods constitute a big portion of imports and exports. Therefore, the analysis of this paper would uncover whether trade good monetary values lead rising prices and if it can be used as an early warning mechanism.
To confirm the above it will hold to be supported with literature reappraisals. Empirical work will be used to prove the decisions reached. Therefore, the relationship between three trade goods ( gold, oil, and Pt ) and consumer monetary values ( nutrient and metal ) will be examined, together with possible exchange rate effects, by doing usage of co-integration and causality trials. Gold and Pt are South Africa & A ; acirc ; ˆ™s two chief trade good exports. Another interesting fact is that South Africa is besides the figure one international manufacturer of both gold and Pt. On the other manus, oil constitutes the chief trade good import of South Africa, hence utilizing these indexs to formalize whether rising prices do so hold a causality map.
In the subdivisions to follow a brief overview will be given of the layout that this paper will follow. The literature reappraisal will uncover the land work of the subject in inquiry. In subdivision 1.2 the general and specific aims will be clarified. In the last subdivision a brief treatment will be given on the agencies and methods to be used to eventually make an overall decision.
Malliaris ( 2006:269-70 ) points out that there is no general model for expecting rising prices. There is besides no definite correlativity between trade good and consumer monetary values, thereby blockading the empirical relationship between the two. Moosa ( 1998:202 ) concurs with this sentiment and happen that empirical surveies produce assorted consequences.
Most of the surveies investigate whether a co-integrating relationship exists between commodity- and consumer monetary value degrees, or instead rising prices ( Furlong and Ingenito, 1996 ; Mahdavi and Zhou, 1997 ; Moosa, 1998 ; Stock and Watson 2003 ; Cunado and de Gracia, 2004 ; Kyrtsou and Labys, 2006 ) .
Other surveies use a signifier of VAR representation ( bivariates ) of the relationship between trade good monetary values and CPI ( Blomberg and Harris, 1995 ; Furlong and Ingenito, 1996 ; Moosa, 1998 ; Cunado and de Gracia, 2004 ; Cutler et al. , 2005 ; Kyrtsou and Labys, 2006 ) . Included in these surveies are variables such as M2, the trade-weighted dollar, the existent GDP and involvement rates are besides included in the VAR specification ( Blomberg and Harris, 1995 ; Furlong and Ingenito, 1996 ; Mahdavi and Zhou, 1997 ; Cutler et al. , 2005 ) .
There is nevertheless a noticeable absence of domestic demand-pull and cost-push control variables in the surveies mentioned above. The absence of such control variables could be explained foremost as an addition in trade good monetary values which might do an addition in the net incomes of exporters. This addition in net incomes and rewards, in bend, causes an addition in aggregative demand which puts upward force per unit area on domestic consumer monetary values. Second, most of these surveies chiefly investigate whether trade good monetary values can be used to foretell rising prices. Therefore, the focal point shifts off from a arrested development analysis that describes inflationary behavior in all its aspects.
Furlong and Ingenito ( 1996:36 ) compiled a survey that pose as an exclusion. They included an unemployment spread as a step to show the force per unit area on the labor market. The decisions reached indicate the demand to include trade goods, every bit good as rewards and net incomes, for more accurate consequences.
The documents contained in the literature used legion empirical methods to research and analyze the information. Thus, following the literature, this paper besides does non trust on any individual method of analysis. These will include co-integration trials, VECM analysis, and causality, every bit good as stableness trials.
Commodity and consumer monetary values are analyzed to set up whether they have an implicit in relationship with rising prices. These consequences can so be farther investigated to find whether they can be used as indexs for rising prices aiming in the hereafter.
Assorted empirical methods will be explored:
Co-integration analysis: To see whether long-run relationship exists between commodity- and consumer monetary values in South Africa.
VECM analysis: To see whether or non commodity- and consumer monetary values portion the same long tally belongingss.
Granger causality trials: To set up whether trade good monetary values are taking indexs of rising prices in South Africa. For this purpose short-term causality between trade good monetary values and rising prices will be examined.
Impulse response analyses and discrepancy decompositions will besides be conducted.
Phase 1: Literature reappraisal:
Phase 2: Empirical survey:
Literature reappraisals will be the chief beginning of research used to find the causality of the chosen subject. Furthermore, empirical work ( where necessary ) will be used to confirm certain decisions that may be reached.
Since the survey of this paper is a general focal point of rising prices in South Africa published informations South African informations ( from National Treasury and Statistics SA for illustration ) will be used. Complimentary beginnings of information such as books, articles, diaries, etc will besides be of great importance to formalize any decisions that may be reached.
As of yet no econometric or statistical techniques has been recognized that could be utile in this paper. However, should such a instance prevail itself and be of usage for statements presented, so the information will be included in the research.