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\"Monetary Policy and the Economy in South Africa covers both modern theories and empirical analysis, linking monetary policy with relating house wealth, drivers of current account based on asset approach, expenditure switching and income absorption effects of monetary policy on trade balance, effects of inflation uncertainty on output growth and international spill overs. Each chapter uses data and relevant methodology to answer empirical and pertinent policy questions in South Africa. The book gives new insights into understanding these areas of economic policy and the wider emerging-markets\"-- Provided by publisher.

We estimate vector autoregressive models to examine the effect of the 3 to 6 per cent inflation target band in the inflation and income inequality nexus in South Africa. We use quarterly data spanning 1993Q1 to 2016Q3 to analyse how growth in income inequality responds to positive inflation shocks when inflation is within the 3 to 6 per cent target band versus when it exceeds 6 per cent. Evidence indicates that positive inflation shocks within the 3 to 6 per cent inflation target band lead to an insignificant decline in income inequality. However, greater income inequality results when inflation exceeds 6 per cent threshold. This suggests that the inflation-income inequality nexus in South Africa is nonlinear due to the 3 to 6 per cent inflation target range. Thus, inflation above 6 per cent is harmful as it increases income inequality. Policymakers should pursue policies that maintain the existing target band.

ABSTRACT This paper estimates various inflation threshold and structural VAR models to investigate the passthrough of oil prices to consumer price inflation in South Africa when inflation is in the 3–6 percent inflation target band compared to when it is above 6 percent. The paper uses monthly data from 2001M1 to 2022M12. We find that the oil price passthrough to inflation is about three times lower when inflation is within the 3–6 percent target band compared to when it is above the 6 percent. Thus, under the inflation targeting framework, the 3–6 percent inflation target band has induced a structural change in the oil price and inflation relationship in South Africa. In addition, a one percentage point oil price inflation shock raises inflation by 0.11 percentage points when inflation is below 4.5 percent compared to 0.43 percentage points above this threshold. These findings imply that the oil price passthrough coefficient in the Bank forecasting model should be half the size when inflation is within 3-6 percent compared to when inflation is above 6 percent.

This paper estimates and contrasts the effects of contractionary monetary policy shocks on output in South Africa and South Korea, using a sign restriction VAR approach. I use quarterly data spanning 1980Q1 to 2010Q3. I investigate how much output movements are induced by monetary policy shocks. The main findings reveal that contractionary monetary policy shock significantly depresses real output for many quarters in South Africa. However, output declines insignificantly and transitorily in South Korea, indicating monetary neutrality. I attribute this difference to the transitory responses of both the monetary aggregate M2 and the exchange rate to a monetary policy shock in South Korea compared to South Africa. This implies that each country, despite targeting inflation, has a different monetary policy reaction function. Evidence shows that the monetary policy shocks explain a large portion of fluctuations in output in these emerging market economies compared to those reported for advanced countries by Uhlig (J Monet Econ 52(2):381–419, 2005) and Rafiq and Mallick (J Macroecon 30:1756–1791, 2008). Lastly, I examined the reasonableness of the estimated monetary policy shocks. Evidence indicates that the estimated monetary policy disturbances capture certain monetary policy activities based on selected major historical and recent real-time macroeconomic shocks.

This paper estimates the long-run impact of the exchange rate depreciation on GDP in South Africa and whether it changed after the 2008 global financial crisis. The paper further determines whether certain channels amplified or dampened the transmission of exchange rate deprecation to GDP after the crisis. The long-run relationship estimated using fully modified ordinary least squares, dynamic ordinary least squares, and ordinary least squares indicates a one percent exchange rate depreciation raises GDP by less than 1.4 percent. Evidence from the model with the interactive global financial crisis dummy and exchange rate shows that the impact of the exchange rate depreciation on GDP was diminished after the crisis. The counterfactual analysis reveals that the exchange rate volatility, foreign demand, investment, imported intermediate inputs, consumption, consumer price level, and export volume channels dampened the stimulative effects of the exchange rate depreciation on GDP post-2008. This evidence indicates a disconnect between the exchange rate depreciation and the GDP relationship. This implies that policymakers cannot rely on the exchange rate depreciation as a potent macroeconomic stabilization policy tool and may not achieve the National Development Plan growth objective via an export-led growth strategy.

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 exchange rate 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.