A cross-country analysis investigating the impact of global crises on the conduct of monetary policy

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