Monetary Policy In South Africa Research Articles

Safeguarding economic stability: the interplay of fiscal dominance and monetary policy in South Africa

PurposeThe purpose of this study is to investigate the interplay between fiscal dominance and monetary policy in South Africa from 1960 to 2023.Design/methodology/approachThe study employs a structural vector autoregression (SVAR) medel to analyze the relationship between fiscal dominance and monetary policy. Short-term and long-term shocks of government borrowing and deficits are examined to understand their impact on inflation dynamics.FindingsFiscal dominance has a significant effect both in the short and long run. There is evidence that government debt and deficits increase inflation, overriding the effects of monetary policy aimed at maintaining price stability. On the other hand, the study reveals that money supply shocks have a greater effect in reducing fiscal dominance compared to interest rate shocks. The variance movement on inflation is significantly explained by government debt and deficits. This emphasizes the persistence of inflationary pressures associated with fiscal dominance, highlighting the importance of effective policy interventions to mitigate inflationary risks.Originality/valueThis study contributes to the existing literature by providing insights into the dynamics of fiscal dominance in South Africa. Moreover, this study extends the theoretical framework of the fiscal theory of the price level (FTPL) and the government budget constraint. This study contributes valuable insights into the dynamics of fiscal dominance in South Africa and offers guidance for policymakers in formulating strategies to safeguard economic stability.

Heterogeneous provincial prices and monetary policy in South Africa: A wavelet-based quantile regression analysis

Although economic agents in different parts of a country face heterogeneous prices, empirical literature continue to assume homogeneity in the monetary policy-inflation nexus, with dire consequences for optimal monetary policy and welfare. Using wavelet-based quantile regressions, we provide a multi-layered asymmetric exposition on provincial inflation-monetary policy relationship in South Africa. We find that whiles restrictive monetary policy delivers stability in the prices of Gauteng, Mpumalanga and North West provinces, it is destabilizing for prices in Eastern Cape, KwaZulu-Natal, Limpopo, Northern Cape and Western Cape provinces. The findings are mixed, for Free State province, depending on the time horizon and quantiles. Our findings present enormous policy and welfare implications, given the inflation targeting status of South Africa and the economic disparities among the provinces of the country.

The fuel of unparalleled recovery: Monetary policy in South Africa between 1925 and 1936

ABSTRACT The newly established South African Reserve Bank (SARB) was tasked to protect the currency by navigating the interwar gold standard, and, from March 1933, maintaining parity with the Pound Sterling. We find that South Africa’s exit from gold secured an unparalleled and rapid recovery from the Great Depression. South Africa’s exit was accompanied by an inextricable link of the SARB’s policy rate to the interest rate set by the Bank of England (BoE). This sacrifice of independent monetary policy allowed the SARB to fix the country’s exchange rate without impeding the flow of gold to London. The SARB fuelled the economy by reducing its policy rates and accumulating gold. Had South Africa not devalued, the country would have suffered a severe depression and persistent deflation. An alternative to the devaluation was for the SARB to pursue a cheap money strategy. By setting interest rates historically low, we find that South Africa could have achieved higher levels of economic growth, at the cost of higher inflation. Ultimately, South Africa’s unparalleled recovery can be ascribed to the devaluation; however the change in the SARB monetary policy and the bank’s control over the gold markets were of paramount importance.

Spillovers of the Conventional and Unconventional Monetary Policy from the US to South Africa

AbstractThis paper assesses the effect of US monetary policy on South Africa during the period 1990–2018. We separately analyse and compare the effect of conventional monetary policy, before the Global Financial Crisis, and unconventional monetary policy, after the US monetary policy reached the zero‐lower bound. Our impulse response function results indicate that monetary policy in South Africa responds mainly to local inflation, economic activity and financial conditions. While there is strong correlation between the global and South African financial cycle, the financial cycle is not transmitted to the real economy because of the sluggish response of industrial production and domestic credit, especially after the global financial crisis. We see this as an indication of the effects of structural issues to the real economy and constrained households’ balance sheet which has prevented the local economy to take advantage of low local interest rates and the global economic recovery after the crisis.

The Effectiveness Of Monetary Policy In South Africa Under Inflation Targeting: Evidence from a Time-Varying Factor-Augmented Vector Autoregressive Model

In the 1970s and 1980s, the economies of several developed and developing countries witnessed much volatility in output growth, inflation and other macroeconomic variables. Thereafter, these became considerably low and more stable. This latter development has been named the "great moderation" with first observation in the US and comparable evidence for other developed and developing economies including South Africa. However, the 2007/2009 economic and financial crisis resulted into heightened uncertainty and volatility. This brings to question the role of monetary policy and its effectiveness in the economy. This paper examines the transmission mechanism of shocks to monetary policy in South Africa using quarterly data from 1980:1 to 2012:4. We also in addition identify demand and supply shocks. Our analyses are based on a factor-augmented vector autoregression with time-varying coefficients and stochastic volatility (TVP-FAVAR), which allows us to simultaneously analyze the changing impulse responses of a set of 177 macroeconomic variables covering the inflation, real activity, asset prices and monetary series. We also have intangible variables, such as confidence indices, and survey variables. These data capture the broad trends in the South African economy. Our results based on the impulse response functions, are consistent with economic theory as we observe no price puzzle that is often associated with the standard VAR models. We find evidence of modest time variation in the transmission of shocks. Overall, the macroeconomic variables seemed to have responded slightly more to the monetary policy shocks in the post -2000 (inflation targeting) sub-period than the pre-2000 period, albeit the differences in the effects are statistically insignificant. The forecast error variance decomposition results show the changes in the macroeconomic variables are largely determined by the demand shock relative to the monetary policy shock although the contribution of the latter increased slightly over time. Our results suggest the need for a more efficient role of the monetary authority as this will both improve its credibility and greater economic stability. As inflation still remains within the upper portion of the 3–6% target range, appropriate mix of supply and demand side policies could be explored alongside monetary policy to reduce inflationary pressures.

The Transmission of Monetary Policy in South Africa Before and After the Global Financial Crisis

AbstractThis paper examines whether the transmission mechanism of monetary policy in South Africa has changed after the global financial crisis (GFC). We use a Bayesian vector autoregressive (BVAR) model with Minnesota priors and 15 monthly variables, extending the system of Christiano, Eichenbaum, with Evans (1999). The benefit of the BVAR approach is that it can accommodate a large cross section of variables without running out of degrees of freedom. To identify the change in the transmission process, we divide the sample size into two subsamples, namely the pre‐GFC period (March 2001 to August 2008) and the post‐GFC period (September 2008 to February 2016). The results indicate that a change in the transmission of monetary policy occurred after the GFC. The magnitude of the effect of a monetary policy shock on output is considerably greater in the pre‐GFC period compared to the post‐GFC period. Moreover, the impact of a policy shock on inflation is not statistically significant in the post‐GFC period. The variance decomposition shows that the interest‐rate channel has possibly weakened in the post‐GFC period.

An empirical analysis on the effects of the inflation targeting framework on monetary policy in South Africa

AbstractThis article examines the impact of the adoption of an Inflation Targeting (IT) framework in 2000 on the conduct of South Africa’s monetary policy. Taylor rule analysis is used to test empirically whether the implementation of IT in South Africa can be shown to have impacted on the conduct of monetary policy. In particular, the article analyses whether the implementation of the IT framework yields the expected changes when comparing the conduct of monetary policy pre and post the adoption of the IT framework. Thereafter, an analysis of term structure of interest rates, which serve as a proxy variable for market expectations, is used to test whether South Africa’s IT framework has resulted in more predictability and transparency in monetary policy conduct. Lastly, the article analyses the impact of the global financial crisis of 2008–2009, the so‐called Great Recession, on the predictability and transparency of monetary policy in South Africa.

Inflation Targeting and Its Impact on Monetary Policy Post 2008 Crisis: A South African Insight

South Africa Inflation Rate declines to 7-Month Low of 4.5%. The annual inflation rate in South Africa fellto4.5percent in December of 2018, reaching the mid-point of the central bank’s target range of 3 percentto 6 percent, from 5.2 percent in theprevious month. It is the lowest annual inflation since May as cost of transport slowed sharply. The main task of microeconomic policy is the promotion of sustainable high economic growth, the creation of employment opportunities, the containment of inflation, improvement of the living conditions of all residents of a country, and the elimination of unjustifiable discrepancies in the distribution of income amongst our people. These economic objectives can best be obtained amongst other things in a stable financial environment. Financial instability is a major obstacle in the fulfilment of this task. Stable financial conditions should be maintained throughout the various phases of the business cycle to attain maximum economic development. In addition, inflation could only have an effect on the rate of unemployment if it could somehow affect the real wage in the economy. That is not impossible since the real wage is determined by the marginal productivity of labour in a competitive system. A number of countrieshave successfully adapted inflation targeting monetary policy framework in recent years. It is a framework based on hitting an inflation target, and it is considered that the target is going to be missed, then determining whether a change in policy stance is called for.In this paper, we briefly asses the viability of implementing an inflation targeting monetary policy framework in South Africa. The monetary policy in South Africa is conducted by the South African Revenue Bank. Those who have lived in South Africa in the past three decades witnessed dramatic uncontrollable price increase, convincing the Government to take serious measures pertaining to supply and demand of money. The paper furthermore, analyses the impact of inflation targeting on monetary policy in general, with a special focus on South Africa as developing country, highlighting the main strategic approaches implemented as well as the obstacles facing the developing countriesand South Africa in particular.

The Nexus between Macro-Prudential Banking Regulation, Interest Rate Spread and Monetary Policy in South Africa

This study is an empirical attempt to investigate the nexus between macro-prudential banking regulation, interest rate spread and monetary policy in South Africa. The effectiveness of monetary policy and alarmingly wide interest rate spread has been a contentious issue in the corridors of central banks across the globe in this lifetime. This has been largely because monetary policy alone proved to be less efficient in mitigating the effects of systemic risk, particularly during the 2007 financial crisis, necessitating the need for macro-prudential banking regulation. Time series dataset spanning from 1994Q1 to 2016Q4 is employed to carry out this study using the restricted Vector Autoregressive (VAR) model, that is, the Vector Error Correctional Model (VECM). The results show that there is no long-run causality running from trade openness, real exchange rate financial depth interest rate spread and credit growth to the repo rate in South Africa. A short run causality running from credit growth to the repo rate exists from the estimated model. In addition, the empirical results exhibited evidence that interest rate spread has a dampening effect on monetary policy but in the long-run this effect seems reversible in South Africa. Therefore, in order to ensure financial stability, care has to be taken by the South African Reserve Bank and government in choosing the best tool-kit of macro-prudential banking regulation as it can be used to disguise the symptoms of a lax monetary policy framework.

An investigation into the ability of the reverse yield gap to forecast inflation and economic growth in South Africa

Background: Monetary policy in South Africa is carried out by the South African Reserve Bank (SARB) with the aim of keeping inflation within a target range of 3% – 6%. The SARB uses a variety of models to aid them, with the core model being the most significant. Aim: The primary aim of this research is to determine whether the reverse yield gap (RYG) contains information that could be useful to the SARB when making monetary policy decisions. Setting: The authors found no evidence that similar studies on the RYG have previously been done in the South African context. Since the yield curve has been found to be significant in South Africa at forecasting economic growth, yet insignificant in Europe, the results for this research may too be different to the global experience. Methods: The authors tested for linear relationships between the RYG and economic growth and inflation over the period 1960–2014. Results: The results indicate that a slight linear relationship may exist in the case of economic growth, with the RYG based on earnings yields showing better out-of-sample forecasting abilities. Further investigation indicates that the linear relationship is stronger during times of economic upturn. The results for inflation forecasting, however, show no signs of a reasonable linear relationship. Conclusion: There is evidence for the SARB to consider whether the RYG can replace other economic variables in its core model without loss of predictive ability. Interestingly, this study found evidence to suggest that the RYG has an inverse relationship to future economic growth in South Africa, which is not what was expected.

Politics and policies: Determinants of South Africa's monetary policy problems in the 1980s

ABSTRACTThe interim and final reports of the De Kock Commission (Republic of South Africa 1985) brought monetary policy in South Africa closer to the international consensus of the 1980s, where explicit nominal anchors supporting a policy commitment were widely shared principles. A nominal anchor for monetary policy was introduced for the first time in South Africa in 1986. Despite the adoption of a nominal achor, the 1980s were characterized by sustained high inflation and financial instability. This paper assesses the role of politics and policies in the period running up to and following the announcement of a nominal monetary policy anchor for South Africa. It is shown that all politics and policies contributed to financial instability and to sustained inflation in the 1980s.

Inflation or output targeting? Monetary policy appropriateness in south Africa

The design and implementation of monetary policy in South Africa has been based on the idea of a trade-off between inflation and output growth. However, in the empirical literature there is no consensus on the existence of a Phillips curve in present times. This study aims to estimate the Hybrid New Keynesian Phillips Curve model with a view to determine whether a Phillips curve exists for South Africa and to ascertain whether backward-looking or forward-looking components drive inflation dynamics. Employing both OLS and GMM estimation techniques and using various measures of the demand-side variables, we do not find evidence of a Phillips curve in South Africa. These findings are robust across estimation methodologies as well as different measurements of inflation expectations and data frequency. Our findings therefore support the argument that monetary policy ought to aim at targeting growth rather than inflation. While our findings indicate that economic agents in South Africa are both rational and adaptive in predicting inflation, the results clearly indicate the dominance of forward looking variables over the backward looking ones in driving inflation. JEL: E31

Examining asymmetric effects in the South African Phillips curve: evidence from logistic smooth transition regression models

This study contributes to the foregoing literature by investigating asymmetric behaviour within the South African short-run Phillips curve for three versions of the Phillips curve specification namely; the New Classical Phillips curve, the new Keynesian Phillips curve and the hybrid new Keynesian Phillips curve. To this end, we employ a logistic smooth transition regression (LSTR) econometric model to each of the aforementioned versions of the Phillips curve specifications for quarterly data spanning from 1970:01 to 2014:01 and thus endeavour into determining which version of the Phillips curve best suites the employed data. Our empirical results indicate that both the marginal-cost-based as well as the output gap-based versions of the hybrid new Keynesian Philips curve provide a good fit for South African data. Therefore, our empirical results indicate that monetary policy in South Africa has an influence on the demand side of the economy through inflation inertia and inflation expectations whilst appearing to exhibit no significant effects on the supply side of the economy.

Inflation persistence and monetary policy in South Africa: is the 3% to 6% inflation target too persistent?

Can the South African Reserve Bank's (SARB) substantially control inflation within their set target of 3% to 6%? We sought to investigate this phenomenon by examining multiple threshold effects in the persistence levels of quarterly aggregated inflation data collected between 2003 and 2014. To this end, we employ the three-regime threshold autoregressive (TAR) model of Hansen (2000). We favour this approach over other conventional linear econometric models as it permits us to test for varying persistency within the autoregressive (AR) components of the inflation process. Our empirical explorations reveal that the SARBs set target does indeed lie within a range in which inflation is found to be most persistent. Overall and more importantly, our results suggest that the SARB should either consider revising their set inflation target by redefining the inflation target range to accommodate higher inflation rates or the Reserve Bank should consider abandoning the inflation targeting regime altogether.

The lean versus clean debate and monetary policy in South Africa

Abstract. This paper contributes to the lean versus clean debate by examining whether or not monetary policy in South Africa leans against the wind or cleans up after the bubble has bust. This is achieved by analysing the behaviour of asset prices during the different phases of monetary policy stance. The models that allow the behaviour of the asset prices to differ during periods of tight and easy monetary conditions as well as during periods of contractionary and expansionary monetary conditions are specified. The results provide evidence of an asymmetric behaviour between monetary policy interest rate and asset prices during the periods of easy and tight monetary conditions. The empirical results further provide evidence of symmetric behaviour between themonetary policy interest rate and asset prices during the periods of contractionary and expansionary monetary conditions. Thus monetary policy in South Africa supports the proposition of leaning against the wind as opposed to the proposition of cleaning up after the bubble has burst. Keywords. Lean versus clean debate, Monetary policy regimes, Financial distress. JEL. C51, E52, E61, G01.

The Accuracy of Professional Forecasts and Monetary Policy in South Africa

This paper analyses the accuracy of professional forecasts of monetary policy interest rate decisions in South Africa since 2008. This is achieved by examining the dissimilarity between the professional forecasts of monetary policy stance and the realised monetary policy interest rate on the basis of proximity, temporal structure and sensitivity to forecast horizon. The results show that the forecasts of South African insurance companies and international banks are closest to the realised monetary policy interest rate on average based on proximity, while the forecasts of South African banks and interest groups are closest to the realised monetary policy interest rate based on temporal structure. The results finally show deterioration of the professional forecasts the further away the forecast horizon and that the heterogeneity in forecast accuracy neither emanates from the country of primary listing nor primary business of the professional forecasts groups.

The Impact Of Oil Prices On Sectorial Employment In South Africa

Failure to create more jobs is a problem faced by many African countries, and South Africa is not spared. Evidence concerning the effect of oil prices on employment is lacking. The paper examines the impact of factor prices (oil prices) on sectorial employment in South Africa over the period 1994 to 2012 using quarterly data. The study employs panel data analysis techniques to split the sectorial effects. The use of panel data econometric techniques to control for unobserved heterogeneity is essential to uncover the result, which is completely hidden in OLS estimates. By adding a dummy of each sector, pure effect of oil prices are estimated through controlling for unobserved heterogeneity. The effect of oil prices is felt most in the finance sector, followed by construction, then trade - all significant at 1%. Since oil price is positively related to employment in these sectors, it implies that the monetary policy in South Africa is accommodative as given a wage rate, increase in the price of oil leads to increase in price level and thus decrease in real wage.

Financial markets and the response of monetary policy to uncertainty in South Africa

This paper analyses the impact of uncertainty about the true state of the economy on monetary policy in South Africa since the adoption of inflation targeting. The paper uses an extended monetary policy rule that allows analysis of the impact of uncertainty about the conditions in financial markets on the interest rate setting behavior that describes the South African Reserve Bank’s monetary policy decisions. The results indicate that the effect of uncertainty on the interest rates has led to a more cautious monetary policy stance by the monetary authorities consistent with a large body of literature that recognizes that an excessively activist policy can increase economic instability. The results further show that uncertainty about the state of the economy clusters around the financial crisis periods in 2003 and from 2007 to 2009. The uncertainty about inflation was important to the interest rate setting behavior in 2003 and between 2007 and 2008, while the uncertainty about the conditions in financial markets was important to the interest rate setting behavior between 2008 and 2009.

Interest Rate Pass-through and Monetary Policy in South Africa: Evidence from ARDL and FMLS Models

Interest Rate Pass-through and Monetary Policy in South Africa: Evidence from ARDL and FMLS Models

Exchange Rate Pass-through to Import Prices, and Monetary Policy in South Africa

Understanding how import prices adjust to exchange rates helps anticipate inflation effects and monetary policy responses. This article examines exchange rate pass-through to the monthly import price index in South Africa during 1980–2009. Short-horizon pass-through estimates are calculated using both single equation equilibrium correction models and systems (Johansen) models, controlling for both domestic and foreign costs. Average pass-through is incomplete at about 50 per cent within a year and 30 per cent in six months, and in the long-run, from the Johansen analysis including feedback effects, is about 55 per cent. There is evidence of slower pass-through under inflation targeting; pass-through is found to decline with recent exchange rate volatility and there is evidence for asymmetry, with greater pass-through occurring for small appreciations.