Abstract
Like in many other countries, the South African financial market facilitates the process of raising capital by channelling funds to more productive economic activity, thereby building the nation's economy while enhancing job opportunities and wealth creation. The aim of this paper is to assess the impact of monetary policy on financial market in South Africa. It is important to constantly look into this interaction since policy decisions have a direct influence on financial market. A negative response from the market side may jeopardise economic stability. The study uses the vector autoregressive (VAR) model to evaluate the impact of monetary policy on financial market in South Africa. The model consists of five policy instruments as variables; namely: money supply (M3), real exchange rate(ER), discount Rate (R), consumer price index (CPI), gross domestic product (GDP) and the two market related variables: Stock market turnover (S) and Bond market turnover (B). Data is obtained from SARB and OECD databases for a period of 53 quarters from 2000:Q1 to 2013:Q1. By the use of impulse response function (IRF), the study found that given current economic situation in South Africa, stock market turnover reacts positively to money supply; discount rate; real exchange and GDP shocks. On the other hand stock market turnover reacts negatively to CPI economic shocks. To correct CPI negative impact on markets, we suggest that the policymakers could envisage a contractionary monetary policy translated by a proportional cut in money supply through the sales of government securities.
Highlights
Like in many other countries, the South African financial market facilitates the process of raising capital by channelling funds to more productive economic activity, thereby building the nation's economy while enhancing job opportunities and wealth creation
A null value indicates that a particular innovation has no effect on a given variable which continues on the same path that it would have followed if there was no shock
The analyses of the interaction between stock market turnover and bond market turnovers in South Africa in Figure 2 reveal that the stock market turnover appears to be an increasing function of money supply; discount rate; real exchange and gross domestic product (GDP)
Summary
Like in many other countries, the South African financial market facilitates the process of raising capital by channelling funds to more productive economic activity, thereby building the nation's economy while enhancing job opportunities and wealth creation. The South African financial market is composed of the Johannesburg Stock Exchange (JSE) and the Bond Exchange of South Africa (BESA). Understanding developments in the financial markets is a cornerstone for monetary policy making (Weber, 2008). The latest empirical authors such as Naraidoo & Raputsoane, (2013), Joyce et al, (2008) among others find a strong correlation between monetary policy and financial market development. Stock and bonds markets have a counter effect on macroeconomic policy. The most direct and immediate effects of monetary policy actions such as the changes in the central bank’s bill rate, take place in the financial markets. By affecting asset prices and returns, policymakers try to modify economic behaviour in ways that will help to achieve their ultimate objectives (Lkhagvajav et al, 2008)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
