Economics

Sources: Howells & Bain, 2004; Ito, 2004; Meulendyke, 1998; Wood, 2020; Winck, 2021 | Why was the Bank of Japan reluctant to adopt an inflation targeting framework? (3 spite of the adoption of inflation targeting in recent years by the G3 countries, little 5 of 5 sen placed on price stability by the G3 central banks. Do you agree with this (3) ain your point of view. many analysts have been calling for the implementation of accommodation monetary policy, which in many countries, including Japan, has not yet yielded any desired results. The same is true in 3.3 South Africa; despite many years of relatively stable prices, the economy still finds itself in (4) stagnating conditions. Do you think monetary policy easing as a tool is enough to bring about growth and development? Explain your view. QUESTION 4 (10) "SOUTH African financial markets recorded steady recovery during January. Higher returns on bonds and listed property shares surprised investors, and the rand had one of its strongest recovery months in more than a year. Foreign sentiment towards South Africa is improving and more and more signs of a steady recovery of the economy are emerging- The news on Thursday that the US Federal Reserve (Fed) turned dovish and foresaw a strong possibility that no further increases in US interest rates were on the cards also fuelled renewed risk appetite for emerging markets assets." https://www.iol.co.za/busin surprise-in-january-19121048 Graphically illustrate and briefly explain the movement that occurred in the rand (against the US$) 4.1 during January. (3) 4.2 Explain what happened to the value of the US$ against the rand. What is likely to happen to the (2) supply of loanable funds in South Africa, ceteris paribus? Read the extract below and answer the question that follows. (5) SONA reaction: Stellenbosch University economics professor Nicola Theron says the implementation of the measures set out by President Cyril Ramaphosa in the 2021 State of the Nation Address (SoNA) will be key for South Africa. With "sober realism", she stated on February 16 that there was "not much new" said during the SoNA, and that there now needed to be "a focus on fixing the fundamentals" in the country, foremost of which should be excellence in planning and execution in government. While Ramaphosa did acknowledge the challenges surrounding the country's State-owned entities and related stresses, Theron lamented that the President spoke about "things that are not really new", such as South Africa's rising unemployment rate, which last saw numbers this high in 2011. The SoNA, according to Theron, made "the right sounds" but she remained concerned about the pace and scale of implementation. These concerns were echoed by Investec chief economist Annabel Bishop, who provided more insight into the financial markets aspect, noting that the SoNA, despite "little to no reaction", provided a sense of optimism in the financial markets. This is also owing to South Africa's Covid-19 vaccination drive, which is expected to bring about the "return to normal". As a consequence of this, Bishop noted that the financial markets had "heavily invested" into emerging markets and their financial assets, whether they be bonds or equities. While South Africa did benefit (though not as much as other emerging markets), she noted that this increased investment and investor optimism had seen the rand improve to about R14.50 to the dollar on February 16. However, Bishop lamented the lack of clarity surrounding the dire state of South Africa's government finances, which "is quite key" for financial markets, especially considering the massive government expenditure bill. "The SoNA was certainly light on a few details, [which resulted] in some of the lack of reaction. While all [of the same themes in the SoNA] were very key, we are just not getting there very quickly," she said. https:/engineering implementation-key-for-south-africas-way-forward-following-ramaphosas-2021-sona-2021-02-16 4.3 Given the context of the case study: How do you think the outcome of SONA 2021 will influence loanable funds in SA? TOTAL: 50QUESTION 3 (10) Inflation targeting and the Group of Three (G3) The G3 is comprised of the United States, Japan and the European countries using the euro (known as the Eurozone). Until relatively recently, all three members were reluctant to adopt a fully-fledged inflation targeting regime. All the central banks of the G3 have been deeply committed to price stability as a goal of monetary policy for at least the past thirty years. In the Eurozone, the primary objective of the European Central bank is defined as the maintenance of price stability and, without prejudicing this objective, the support of general economic policies of the European Union. The general economic policies of the EU, according to Article 2 of the Treaty of the Union, are to promote the following throughout the community: A harmonious and balanced development of economic activities A sustainable and non-inflationary growth that respects the environment A high degree of convergence of economic performance A high level of employment and social protection The raising of living standards and quality of life Economic and social cohesion, and solidarity among member states (1992:5) In order to achieve these objectives, the ECB follows a two-pillar monetary approach. The first pillar is provided by a reference value for the money supply M3, where prolonged or substantial deviations from this reference value signal risks to price stability over the medium term. The ECB has clearly stated that deviations from this reference value will not automatically lead to changes in interest rates, and that this rather follows a weak form of monetary targeting. The reference value of M3 is hence more of an important indicator of risk than an actual target. The second pillar of the ECB's monetary policy approach is a broad-based assessment of the outlook of price development, which is derived from a wide variety of economic indicators. In this sense, the ECB takes account of all the information that is relevant for future price developments. In addition, the ECB announced a price stability definition of slightly below 2%, measured as a year-on-year rate in the Harmonised Index of Consumer Prices. In Japan, the aim of monetary policy is described as the pursuit of price stability to contribute to the sound development of the national economy. The Bank of Japan has not been very explicit on the monetary policy framework that applies to achieve this objective, probably due to the fact that since the adoption of the new Central Bank Act in April 1998, the central bank has been battling to solve persistent deflationary conditions. In coping with this problem, price stability was defined as a condition where there is no inflation or deflation, with the authorities adopting non-conventional policy measures. These measures consisted of the application of a zero interest rate policy, together with measures aimed at the quantitative easing of liquidity. The monetary base was increased by creating excess reserves, through the purchase of long-term government bonds and even riskier assets, including commercial paper, corporate bonds, equities and the bonds of non-residents. Since the recent economic slump, these kinds of measures have also been pursued by the United States and the ECB. The Bank of Japan was reluctant to adopt inflation targeting as their monetary policy framework because they argued that, in contrast to the other countries, they would apply this framework in order to increase inflation. However, at the beginning of January 2013 the Bank of Japan officially adopted an inflation target of 2% as part of the measures to stimulate economic growth. Inflation was 0.3% in 2020, with economic growth averaging at 0.41% between 1980 and 2020. In the US, the Federal Reserve System has been tasked with carrying out monetary policy in such a way that it promotes sustainable economic expansion and reasonable price stability. However, since the beginning of the 1980s, price stability has become the dominant goal of the FRS, based on the argument that such stability is essential for the achievement of sustainable economic growth rate. In 2020, the FRS placed the employment end of its mandate above the inflation side, arguing that it will tolerate higher inflation in the interest of broad, inclusive employment gains. Until the beginning of 2013, the monetary policy regime of the FRS was one of informal inflation targeting, in which greater attention was given to the economic performance of the economy than in fully-fledged inflation targeting countries. In January 2013, the Federal Reserve announced that it had adopted an inflation target of 2%, as measured by the personal consumption expenditure price index. This target is regarded to be consistent with its congressionally mandated goals of price stability and full employment. It did not adopt a fixed goal for employment because the level of unemployment that can be achieved without resulting in accelerated inflation is determined largely by factors other than monetary ones. The overall performance of the economy would continue to be an important factor in the determination of monetary policy. The new approach of the Federal Reserve can be described as flexible inflation targeting, which enables the central bank to conduct a stabilisation programme without departing from the longer-run goal of keeping inflation low and stable. The Federal Reserve updated its inflation target in August 2020 after years of weaker-than-expected price growth. Known as average inflation targeting, the framework seeks inflation that averages 2% over time and, therefore, allows for periods of above -2% inflation. The new policy signals the Fed will keep easy monetary conditions in place well into the US economic recovery. Sources: Howells & Bain, 2004; Ito, 2004; Meulendyke, 1998; Wood, 2020; Winck, 2021