Constraints exerted on interest rate setting behaviour of central banks by high public debt is well acknowledged in the theoretical literature. Empirical evidence, however, remains limited. The few empirical studies either fail to provide confidence intervals for the threshold estimate (a limitation that raises concerns of precision of such an estimation for the purposes of policy) or are substantially constrained by data unavailability which hampers econometric inference. Yet, establishing the nature of such constraints is important because it highlights the nature of risk of breach of publicly announced inflation targets under inflation targeting regimes and feeds into central bank independence debate. With a complement of an expansive dataset, we account for debt constraint in the interest rate setting behaviour of the South African Reserve Bank using a Taylor rule. We find that the policy response to inflation gap in the high-debt regime is substantially constrained.

References are not ready for this file yet, please refer to reference from the PDF file

Keywords

Monetary policy; public debt; inflation; sample splitting; threshold regressions.