Monetary Policy Shocks and Industrial Sector Performance in South Africa

Adebayo Augustine Kutu,Harold Ngalawa

doi:10.22610/jebs.v8i3(j).1286

Adebayo Augustine Kutu, Harold Ngalawa

Open Access

https://doi.org/10.22610/jebs.v8i3(j).1286

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Abstract

This paper employs an eight variable Structural Vector Auto regression (SVAR) model to examine how monetary policy shocks affect industrial sector performance in South Africa using monthly data from 1994:1 to 2012:12.The study finds no direct link between exchange rate and interest rate shocks and industrial output growth. A money supply shock, however, is observed to exert a significant positive impact on industrial output growth from about the eighth month. The study also reveals that the interest rate response to an unanticipated increase in the rate of inflation is insignificant, reflecting the infrequent changes of the repo rate in the country. We also find evidence of a symbiotic relationship between industrial output growth and other sectors of the economy that form components of aggregate output. The study further demonstrates that monetary authorities have very limited control over industrial output growth using instruments of monetary policy. In addition, it is found that relatively large proportions of the variations in the rate of inflation are explained by changes in money supply, exchange rates and industrial output. We also observe that variations in exchange rates are largely explained by unexpected changes in the exchange rates themselves, which supports the Martingale Hypothesis of exchange rates.

Highlights

While some studies have attributed the high unemployment rate (25.5%) in South Africa to the country’s low industrial sector performance, other studies have shown that monetary policy can play a significant role in determining variations in output and prices, and stimulating economic growth and a rise in employment
Impulse response functions: Impulse responses are constructed for shocks to all variables in the Structural Vector Auto regression (SVAR) model to provide an exogenous source of variation that allows us to identify the response of selected variables in the economy to monetary policy shocks
The positive aggregate output shock may indicate an increase in the production of goods and services that is likely to have important forward and backward linkages to industrial production, which probably explains the positive response of industrial output growth

Summary

Introduction

While some studies have attributed the high unemployment rate (25.5%) in South Africa to the country’s low industrial sector performance (see Rodrik, 2008), other studies have shown that monetary policy can play a significant role in determining variations in output and prices, and stimulating economic growth and a rise in employment (see Rafiq & Mallick, 2008). Similar papers by Kasai and Gupta (2010) and Gupta et al (2010) have focused on the effects of monetary policy on real housing growth and prices in South Africa, while Rafiq and Mallick’s (2008) study is on the effects of monetary policy shocks on output in the euro-area economy. Following this introduction, the rest of the paper is structured in five sections.

Monetary Policy Shocks and Industrial Sector Performance

Empirical Results and Data Analysis

Conclusion and Policy Implications