Interaction Between Economic Policy and GDP Growth Uncertainties: Implications for South African GDP Growth

Abstract

This chapter determines and compares the responses of South African economic growth to positive (i) foreign economic policy uncertainties (ii) foreign GDP growth uncertainties and (iii) foreign GDP growth shocks. Does South African economic policy uncertainty act as an inward transmitter and conduit of foreign economic policy uncertainty shock to the domestic GDP growth? Do foreign GDP growth uncertainties act as transmitters and conduits of foreign economic policy uncertainty shock to the South African GDP growth? Does a combination of economic growth uncertainty and policy uncertainty impact domestic exports growth? Evidence in this chapter confirms that economic policy uncertainty tends to exert negative effects on foreign economic growth in this chapter. The negative spillover of foreign policy uncertainty results in a contraction in South African economic growth. In addition, the South African economic policy uncertainty acts as an inward transmitter and conduit of foreign economic policy uncertainty shock to domestic GDP growth. At the same time, foreign GDP growth uncertainties transmit foreign economic policy uncertainty shock to South African GDP growth. However, the big decline in the actual GDP growth than the counterfactual responses implies that South African policy uncertainty leads to the worsening in economic growth contraction following the foreign policy uncertainty shock. Furthermore, positive European GDP growth raises South African exports to the Euro area and the increases are much higher in the long run when South African policy uncertainty is shutoff than when operating in the model. This shows that the exports channel explains why South African economic growth may not benefit to the maximum from the improvement in European GDP growth impulse.