Foreign GDP Growth Uncertainty Shocks and the South African Economy

Abstract

This chapter examines what would have happened to domestic economic growth and the policy rate in the absence of US, UK, European, Germany and Italy GDP growth uncertainty shocks. In addition, this chapter examines whether the evolution of the repo rate in anyway was influenced by uncertainties in foreign GDP growth . We apply the counterfactual approach to determine what the repo rate would have been if the effects of these GDP growth uncertainties are removed. Evidence shows that South African economic growth falls in response to increased foreign economic growth uncertainty shock. The repo rate declines by more than the level that would have prevailed in the absence of the foreign growth uncertainties. Moreover, based on the sources of uncertainties, the European growth uncertainties seem to have led to a significant decline in the repo rate since 2009 when compared to US growth uncertainties. Overall, the policy rate is loosened much more following elevated positive external economic growth uncertainties when the US, UK, European, Germany policy uncertainty channels are allowed to operate in the model than when they are shutoff. This suggests that the economic policy uncertainty channel amplified the loosening in repo rate. However, the amplification is much larger due to the South African economic policy uncertainty compared to those from the UK and Europe. The findings show that a thorough understanding of foreign and domestic economic policy uncertainties linkages is necessary to assist policymakers to design policies that take into consideration the anticipated effects of such shocks.