Abstract
The study uses the annual time series data for the period 1975 – 2012 to empirically examine the impact of monetary policy on private capital formation in South Africa with the view to establish any long-run relationship. The unit root test was conducted prior to regression using the Dickey-Fuller Generalised Least Squares (DF-GLS) and the Ng – Perron tests. The Granger causality test was also conducted to establish the direction of causation between variables included in the model. The unit root test results reveal that inflation, gross private capital formation and real exchange rate are stationary at first difference while real interest rate is stationary at levels.The bounds test approach asserts that variables could still drift together even when they are integrated of different orders (Pesaran, 2001). Cointegration test indicates an existence of long-run relationship among the variables included using Autoregressive Distributed Lag(ARDL)-ECM cointegration procedure advanced by Pesaran et al.(2001). The results of this study indicate that the cost of capital (interest rate) exerts a significant and negative impact on South Africa’s private capital formation. DOI: 10.5901/mjss.2014.v5n1p181
Highlights
The role of macroeconomic policies on private capital formation has drawn interests amongst researchers and analysts
As much as other studies could come to a different conclusion about the dropping of these variables, they are found to be insignificant for South Africa
The role of Private Capital Formation (PCF) in engineering growth and development is highly appreciated, PCF is inclined to changes in Government Policy (GP)
Summary
The role of macroeconomic policies on private capital formation has drawn interests amongst researchers and analysts. To the above conclusion, Badawi (2005) argues that monetary policy through credit and interest rate channels has significant impact on private capital formation.Badawi (2005) found these variables to have had significant impact on private capital formation in Sudan over the period 1969-1998. His findings support the modern Keynesian Paradigm. That broad number of factors determine private capital formation in developing countries, the most relevant are output growth, FDI, real exchange rates, fiscal policy in the form of government spending (fiscal deficits), real interest rates and uncertainty. That is on private sector capital formation in the economy
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