Abstract
This study empirically examines the influence of shocks in the US federal funds rate on the Republic of South Africa’s output gap, consumer prices, 91-day T Bill rate and the Rand-US Dollar exchange rate from the first quarter of 1981 to the last quarter of 2014 with the use of a structural vector autoregressive (SVAR) model. Shocks in the US federal funds rate are found to have more of an impact on the South African inflation rate relative to other domestic macro variables. Domestic developments were found to play the most significant role in explaining the fluctuations of South Africa’s macro-variables. In light of the SARB’s inflation targeting monetary policy regime, it is recommended that it remains mindful of domestic developments as well as movements in the US federal funds rate in order to determine their upside risks to inflation before deciding on a policy stance.
Highlights
The ever increasing pace of globalisation has resulted in a profound level of interconnectedness among the world’s countries
This development has led to economies being vulnerable to external shocks1 that translate into enhanced volatility across domestic macroeconomic variables [1] together with [2]
These results are disregarded on the basis of the assertion by [33] that normality is not a necessary condition for the validity of many of the statistical procedures related to vector autoregression (VAR) models
Summary
The ever increasing pace of globalisation has resulted in a profound level of interconnectedness among the world’s countries This development has led to economies being vulnerable to external shocks that translate into enhanced volatility across domestic macroeconomic variables [1] together with [2]. In the case of the Republic of South Africa (South Africa), [11] noted that the US is one of the country’s top five export trading partners and was the second most important destination for its exports in 2015 after China It is against this backdrop that this paper investigates the impact of a shock in the US policy rate (the federal funds rate) on a set of macroeconomic variables from South Africa, a country with a floating exchange and an inflation targeting monetary policy regime
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