Sources of current account fluctuations in South Africa" a vector autoregressive analysis
In recent years the South African economy has faced persistent current account deficits which policymakers have labeled as worrisome. In order to identify the sources of current account deficits in South Africa, we employ a four-variable Vector Autoregressive (VAR) model. The Blanchard–Quah decomposition approach is used to impose long-run relationships on the following shocks; foreign income, domestic supply, relative demand, and real exchange rate. Our results indicate that the trade balance, a proxy for the current account balance, fluctuations in South Africa are mainly driven by relative demand shocks and to a lesser extent, by real exchange rate shocks and foreign income shocks. In addition we, find that domestic supply shocks have an insignificant effect on the trade balance fluctuations. Our findings suggest that demand management policies such as fiscal policy and credit policies should be considered as measures to reduce macroeconomic vulnerabilities associated with wide current account deficits, whilst policy interventions aimed at influencing the level of the exchange rate should not be expected to have a significant long-run effect on the trade balance.
A Research Report submitted in partial fulfillment of the requirements of the degree of Master of Commerce (Economics) in the School of Economic and Business Sciences, Faculty of Commerce, Law and Management, University of the Witwatersrand, March 2018