Abstract
This paper identifies the basic empirical characteristics and changes of the South African business cycle since 1960. As such, the paper examines changes in volatility as well as the co-movement between several national account variables and real GDP. To examine the co-movements the paper follows Kydland and Prescott, Gavin and Kydland as well as Bergman, Bordo and Jonung and uses correlation coefficients and Granger causality tests. Following Ramos, the paper extends the results of the Granger causality tests using variance decomposition analysis in the context of a VAR (vector auto regression) to establish the contribution that selected national account variables make to the h-period-ahead forecast error variance of themselves and the other variables included in the VARs. The paper indicates that since 1994 volatility in the South African economy decreased significantly, while durable consumption appears to lead the business cycle.
Highlights
Interest in business cycle behaviour has been rekindled during the last two decades
The analysis indicates that some of those components of GDP that experienced a large decrease in their standard deviations are components of which the gaps display statistically significant and relatively sizable correlation coefficients with the real GDP gap
The variance decomposition support the Granger causality findings and, as such, provide further evidence of the key role played by semidurable consumption in the second period and durable consumption in the third period
Summary
Interest in business cycle behaviour has been rekindled during the last two decades. Kydland and Prescott (1990:3–4) note that business cycle research in the 1950s–70s focused either on creating business cycle theory, or empirical work that was based on structural systems of behavioural equations, themselves based on the theory. Kydland and Prescott argue that there is not just room, but, a need for such research dedicated to establishing the empirical characteristics of business cycles They continue that the need arises from wrong assumptions often made in the past about the co-movement between variables (Kydland & Prescott, 1990:4). They state that to first identify the empirical characteristics of the business cycle lays the groundwork to creating theory that will explain these empirical characteristics. The paper examines the correlation and co-movement between several national account variables and real GDP
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