REVIEW OF THE FINANCIAL AND ECONOMIC SITUATION IN SOUTH AFRICA*

I have pleasure in formally presenting to you the Final Accounts of the Bank, and the Reports of the Board and the Auditors, for the year ended 31st March 1969. I also submit to you the Bank's Annual Economic Report which describes in some detail the economic and monetary developments in South Africa during the year ended June 1969 and which in general serves as a background to my remarks today. As is customary, however, I will survey these developments very briefly before discussing the present situation and the prospects for the near future.     

Corporate Debt Structure and the Financial Crisis

We present a DSGE model where firms optimally choose among alternative instruments of external finance. The model is used to explain the evolving composition of corporate debt during the financial crisis of 2008–09, namely, the observed shift from bank finance to bond finance, at a time when the cost of market debt rose above the cost of bank loans. We show that the flexibility offered by banks on the terms of their loans and firms' ability to substitute among alternative instruments of debt finance are important to shield the economy from adverse real effects of a financial crisis.     

Coordinating Monetary and Macroprudential Policies

This paper studies noncooperative games between a monetary authority and a macroprudential regulator whose objectives are a subset of those in the social loss function. The analysis is based on a New Keynesian model with a financial sector and a financial friction à la Gertler and Karadi (2011). When the friction affects the financing of all factors of production equally, macroprudential policy is shown to be a powerful additional tool, fully eliminating inefficiencies, regardless of the source of the shock and no matter whether the central bank and the regulator cooperate. But when trade‐offs are present and policy is discretionary, the institutional arrangements become crucial. While coordination leads to higher welfare than a setting in which each authority takes the decision rule of the other as given (namely, the Nash equilibrium), our analysis shows that a noncooperative setting in which the macroprudential authority acts as a leader within the period can be superior to cooperation. Finally, our conclusions are unaffected by whether the macroprudential instrument affects funding costs or acts as a liquidity requirement.     

Inefficient Public Provision in a Repeated Elections Model

We consider a dynamic setting with no policy commitment. Two parties that compete for election must choose the level of provision of a public good as well as the tax payment needed to finance it. The cost of producing the good may be high or low and this information is not known to the voters. We show that there exists an equilibrium in which the party that does not want much of the public good uses the inefficient (high cost) technology even though the efficient one is available. Using the low cost technology would, by informing the voters about the cost parameter, force it to produce an excessively high level of the good in the future. Interestingly, this equilibrium is not symmetric, suggesting that a party with a strong taste for the public good is less likely to adopt a wasteful policy.     

Optimal Fiscal Policy with Consumption Taxation

We characterize optimal fiscal policies in a general equilibrium model with monopolistic competition and endogenous public spending. The government can tax consumption, as alternative to labor income taxes. Consumption taxation acts as indirect taxation of profits (intratemporal gains of taxing consumption) and enables the policymaker to manage the burden of public debt more efficiently (intertemporal gains of taxing consumption). We show analytically that these two gains imply that the optimal share of government spending is higher under consumption taxation than with labor income taxation. Then, we quantify numerically each of these gains by calibrating the model on the U.S. economy.     

Redenomination Risk

Euro redenomination risk is the risk that a euro asset is redenominated into a devalued legacy currency. We propose a time‐varying, country‐specific intra‐euro area redenomination risk measure, defined as the quanto credit default swaps (CDS) of a member country relative to the quanto CDS of a benchmark member country. Focusing on Italy, Spain, and France and using Germany as benchmark, we show that the redenomination risk shocks significantly affect sovereign yield spreads, with Italy and Spain being most adversely affected. Finally, foreign redenomination risk shocks spill over and above local redenomination risk shocks, suggesting that this risk is systemic.     

Strategic Network Disruption and Defense

We study a game between a network designer, who uses costly links to connect nodes in a network, and a network disruptor who tries to disrupt the resulting network as much as possible by deleting either nodes or links. For low linking costs networks with all nodes in symmetric positions are a best response of the designer under both link deletion and node deletion. For high linking costs the designer builds a star network under link deletion, but for node deletion excludes some nodes from the network to build a smaller but stronger network. For intermediate linking costs the designer again builds a symmetric network under node deletion but a star‐like network with weak spots under link deletion.     

Flow Effects of Central Bank Asset Purchases on Sovereign Bond Prices: Evidence from a Natural Experiment

We estimate the response of sovereign bond prices to net supply shocks caused by purchase operations under the ECB's Public Sector Purchase Programme (PSPP). To avoid simultaneity bias in the estimated relationship between prices and purchases, we exploit a PSPP feature that renders securities temporarily ineligible for reasons unrelated to their prices. Using these purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that PSPP causes statistically significant and economically relevant upward price impacts. The impacts are short-lived and concentrated in securities issued by higher yield jurisdictions and characterized by higher maturity and lower liquidity.     

Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)

We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax-haven countries after FATCA implementation, consistent with a decrease in “round-tripping” investments attributable to U.S. investors’ offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post-FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of U.S. citizens and greater investment in alternative assets not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature and policy analysis on regulation, tax evasion, and crime.