A vector autoregression approach to the effects of monetary policy in South Africa

Ndou, Eliphas
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This dissertation applies vector autoregression approaches to assess the effects of the monetary policy in South Africa. First, the dissertation quantified declines in the consumption expenditure attributed to the combined house wealth and credit effects due to the contractionary monetary policy shocks. The results at the peak of interest rates effects on consumption on the sixth quarter provide little support that the indirect house wealth channel is the dominant source of monetary policy transmission to consumption. Second, the dissertation assessed how real interest rate reacts to positive inflation rate shocks, exchange rate depreciation shocks and the existence of Fisher effect over longer periods. Evidence confirmed the Fisher effect holds over longer horizons and the real interest rate reacts negatively to the inflation and exchange rate shocks. In addition, findings show that the strict inflation-targeting approach is not compatible with significant real output growth. The results show that only the real effective exchange rate is growth enhancing under flexible inflation targeting approach. Third, the dissertation investigated and compared the effects of contractionary monetary policy and exchangerate appreciation shocks on trade balance in South Africa. Evidence suggests that the exchange rate appreciation shocks worsen the trade balance for longer periods than contractionary monetary policy shocks in South Africa. In addition, the findings indicate that monetary policy operates through the expenditure switching channel rather than the income channel in the short run to lower net trade balance. Finally, the dissertation investigated the effect of contractionary monetary policy shocks on output in South Africa and Korea. The chapter compared what the estimated structural shocks suggested about policy shocks relative to bank systematic responses. Evidence shows that a contractionary monetary policy shock reduces output persistently in South Africa compared to transitory declines in Korea. The estimated monetary policy shocks suggest that Korean monetary policy was expansionary during the recession in 2009 unlike the South Africa counterparty. I attribute the differences to monetary policy intervention tools such as swap arrangement, in addition to interest rate reductions used to deal with recession in Korea.