A cross-country analysis investigating the impact of global crises on the conduct of monetary policy
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Date
2021
Authors
Lamparelli, Daniela
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Abstract
The first two decades of the 21st century have seen two global crises of historic proportions, namely
the 2008-2009 Financial Crisis and the ongoing COVID-19 pandemic. During such events, central
banks are often the first line of defence against shocks that threaten to destabilise the economy. For
institutional and political reasons, monetary policy’s interest rate responses can be deployed more
rapidly than fiscal policy interventions such as spending, taxation and borrowing changes. Despite
their relative speed, such monetary policy interventions normally have far-reaching impacts in both
financial markets and in the real economy. The chief objective of this paper is to study how monetary
policy authorities across a range of countries have responded to global shocks, and to show, using the
Taylor (1993) Rule and other related tools of analysis, how this conduct has differed from the conduct
of monetary authorities during non-crisis periods.
1
In this paper, Taylor Rule regressions are used to examine the monetary policy conduct of ten central
banks: that of South Africa, Brazil, Colombia, Mexico, Peru, Israel, the Republic of Korea, the United
Kingdom (UK), the United States (US) and the European Central Bank (ECB) for the Euro Area.
Particular focus is placed on South Africa and how its monetary policy behaviour compares to that
of the other countries in the sample. In accordance with the existing literature, two econometric
techniques, namely Structural Break Analysis and Markov Switching Regressions, are used in order
to identify whether there were changes in monetary policy conduct after the 2008 Financial Crisis.
Therefore, the central question this paper seeks to answer is: How did the monetary policy conduct
of South Africa’s central bank change after the 2008 Financial Crisis and how did this compare to the
impact of the Crisis on the policy conduct of a number of other central banks? As a secondary
question, the same methods are used to consider, tentatively, given the ongoing nature of the crisis,
the impact of the 2020 COVID-19 Crisis on central bank monetary policy conduct. It is hypothesised
that the impact of global crises is to cause at least one of the time series parameters to change, thereby
altering the coefficients or weightings within monetary policy rules
Description
A research report submitted in partial fulfilment of the requirements for the degree of Master of Economic Science to the Faculty of Commerce, Law and Management, School of Economics and Finance, University of the Witwatersrand, Johannesburg, 2021