Macroeconomic implications of uncertainty in South Africa

Theshne Kisten

doi:10.4102/sajems.v23i1.3350

Abstract

Aim: This article explores the extent to which economic policy uncertainty (EPU) influences selected macroeconomic variables in South Africa (SA). Methods: To this end, I construct a constant parameter vector autoregressive (VAR) model and a time-varying parameter (TVP) VAR model, where the latter model evaluates if the impact of uncertainty on the macroeconomic variables has changed over time. Setting: The models are estimated using quarterly South African data over the period 1990 to 2015, which include industrial production growth, consumer price inflation, 10-year government bond yield, real effective exchange rate, and economic policy uncertainty. Cholesky ordering of the variables are imposed to recover the orthogonal shocks. Results: The results of the constant parameter VAR model suggest that an unanticipated positive shock to the uncertainty index results in a decline in industrial production and real effective exchange rate, while fostering an increase in the general price level and 10-year government bond yield. Time-varying impulse responses show that the impact of uncertainty shocks on the selected macroeconomic variables has declined systematically over time. This is perhaps intuitive as the new unanticipated information is gradually picked up by media over time and incorporated into rational agents’ decision-making. Conclusion: The transmission of a positive uncertainty shock to the real economy has time-varying implications.

Highlights

Over the past few years, a growing number of official local and international publications have mentioned political uncertainty as a major factor influencing macroeconomic dynamics in South Africa (SA)
The most recent International Monetary Fund (IMF) World Economic Outlook publication released in October 2017 stated that ‘in South Africa, growth is projected to remain subdued ... as heightened political uncertainty saps consumer and business confidence’
My article will attempt to quantify the impact of economic policy uncertainty (EPU) on selected macroeconomic variables in SA by constructing a constant parameter vector autoregressive (VAR) model

Summary

Introduction

Over the past few years, a growing number of official local and international publications have mentioned political uncertainty as a major factor influencing macroeconomic dynamics in South Africa (SA). My article will attempt to quantify the impact of economic policy uncertainty (EPU) on selected macroeconomic variables in SA by constructing a constant parameter vector autoregressive (VAR) model. It extends the evidence that uncertainty shocks result in drops in real activity in developing countries It provides evidence on the time-varying impact of EPU shocks on the macroeconomic dynamics of an emerging market economy (SA in this case), by allowing for the variance of the structural shock, as well as the coefficients to vary over time. Redl (2015) examined the impact of uncertainty shocks on the South African economy by means of a constant parameter VAR, finding that an unanticipated shock in the uncertainty index is linked to a decline in investment, private sector employment, output and industrial production, while resulting in an inflationary shock. The author did not examine if this impact changes over time

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Results