Has the South African Reserve Bank responded to equity returns since the sub-prime crisis? An asymmetric convergence approach

Abstract

The global financial crisis of 2008 sparked an ongoing debate concerning the interlink between monetary policy and equity returns. This study contributes to the debate by examining whether the South African Reserve Bank (SARB) repo rate responds asymmetrically to changes in the returns on four equity indices on the Johannesburg Stock Exchange (JSE). Our empirical model is the momentum threshold autoregressive (MTAR) model which is applied to monthly data corresponding to periods before the financial crisis (2002:01-2008:08) and periods after the crisis (2008:08-2016:12). There are three main findings which can be derived from our empirical analysis. Firstly, we find a significantly negative relationship between equity prices to the repo rate before the crisis and this relationship turns insignificant in periods after the crisis. Secondly, we find that the reserve bank mainly monitored positive disturbances to equity indices before the crisis whereas after the crisis the reserve bank appears to be more responsive to negative equity deviations. Lastly, we find significant error correcting behaviour in periods before the crisis but not afterwards. Overall, our results indicate that the SARB appears to have been responsive to equity returns prior to the crisis but not for subsequent periods.