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Trouble Every Day: Monetary policy in emerging economies, a study of South Africa

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We present a comprehensive analysis of monetary policy in South Africa by employ- ing a state-of-the-art high-frequency identification. Using future contracts, we extract four monetary policy surprises affecting the short-, mid-, and long-end of the yield curve, and country risk premia. We report three main results from an event study and an identified VAR. First, conventional monetary policy works in a standard manner in a small open emerging market, with tightenings generating contractionary effects on real, nominal, and financial variables. Second, the risk premia shocks produce strong macro effects. Third, monetary surprises represent a relevant share of policy rate decisions, indicating that policymakers always surprise market participants. Furthermore, surprises correlate with the central bank forecasts, as well as global shocks. These findings point to markets having uncertainty regarding both the state of the economy and the reaction function of the bank.

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