Public spending, credit market conditions and economic activity in South Africa

Abstract

AbstractThis study investigates the effects of public spending shocks across South Africa's credit market conditions from 1965Q2 to 2022Q1 employing a Threshold Vector Autoregression model. Credit conditions are approximated by credit growth. The empirical findings exhibit that the financial environment matters. More specifically, the output multipliers of 1 or 2 standard deviations of positive or negative shocks to public spending are less than unity but bigger when the credit market is in a tight condition. When we look at the public spending components, the output multipliers are more than unity for the public investment shocks in the tight credit condition but not for public consumption shocks. In terms of the output components, both private consumption and private investment multipliers are found to be small, though larger in the tight credit condition. Finally, while public spending shock causes an increase in private credit volume in tight credit conditions, it leads to a decline in private credit volume in easy credit conditions. These results are examined in terms of their policy recommendations.