ESTIMATING MONETARY POLICY RULES FOR SOUTH AFRICA

The paper combines the estimation of the Monetary Conditions Index (MCI) with the theoretic modelling of optimal monetary policy in South Africa. The idea that monetary policy is not only interested in optimal monetary conditions but also in external stability, provides the basis for the analysis. The paper introduces the concept of the MCI and estimates the relative influence of interest rates and exchange rates on the output gap. The estimated weights are 1.9:1. This estimation results is used to specify operating target rules for South African monetary policy.     

ASSESSING MONETARY POLICY IN SOUTH AFRICA IN A DATA‐RICH ENVIRONMENT

This paper examines the efficacy of monetary policy in the South African economy using a data‐rich framework. We use the Factor‐Augmented Vector Autoregressive (FAVAR) methodology, which contains 110 monthly variables for the period 1985:02‐2007:11. The results, based on impulse‐response functions, provide no evidence of the price puzzle observed in traditional Structural Vector Autoregressive analysis and confirm that monetary policy in South Africa is effective in stabilising prices. Unlike the traditional vector autoregressive approach, the FAVAR methodology allows further analysis of a large number of variables. Variables from real and financial variables react negatively to a contractionary monetary policy shock. Finally, we find evidence of the importance of a confidence channel transmission following a monetary policy shock.     

THE CYCLICALITY OF MONETARY AND FISCAL POLICY IN SOUTH AFRICA SINCE 1994

This paper uses a structural vector‐autoregression approach to discuss the cyclicality of fiscal and monetary policy in South Africa since 1994. There is substantial South African literature on this topic, but much disagreement remains. Though not undisputed, there is growing consensus that monetary policy has contributed to the remarkable stabilisation of the South African economy over this period. The evaluation of the role of fiscal policy in stabilisation has been less favourable and there is little evidence that a countercyclical fiscal stance was a priority over this period. This paper considers these issues in an empirical framework that addresses some of the shortcomings in the literature. Specifically, it constructs a structural model in contrast with the reduced form models typically used in the South African literature, incorporates the dynamic interaction between monetary and fiscal shocks on the demand side and supply shocks on the other, and avoids controversy over “neutral” base years and the size of fiscal elasticities. The model confirms the consensus on monetary policy, finding it to have been largely countercyclical since 1994. On fiscal policy, this paper finds evidence of pro‐cyclicality, especially in the more recent period, though the policy simulations suggest that the pro‐cyclicality of fiscal policy has had little destabilising impact on real output.     

THE TRANSMISSION OF MONETARY POLICY UNDER THE REPO SYSTEM IN SOUTH AFRICA: AN EMPIRICAL ANALYSIS♣

The study examines the influence of the repo rate on the interbank rate and analyses whether the transmission channels of interest rates have changed since the adjustment to the repo system in September 2001. The paper employs the Granger causality test using the ECM framework. The results suggest that the influence of the repo rate on the interbank rate was stronger before the adjustments to the system were made. The interbank rate and the repo rate were found to “reverse” roles in the period after the adjustments to the system. Our results show that the changes to the repo system in 2001 did not lead to the achievement of the intended transmission channel; instead it was found that the system in place before the changes were made was in fact already achieving the transmission path that the authorities hoped to accomplish by changing the system.     

THE ROLE OF COMMODITY PRICES IN MACROECONOMIC POLICY IN SOUTH AFRICA

This paper examines whether commodity prices can be used as signal for informing macroeconomic policy in South Africa using the new approach for testing Granger causality developed by Toda and Yamamoto (1995 ). Evidence of causality from average gold price to interest rate, money, exchange rate and the consumer price index was observed. Again, evidence of causality was observed from metals price index to interest rate, money and exchange rate. The results suggest there is merit in using South Africa's average gold price and the metals price index of the International Monetary Fund as informational variables in setting monetary policy.     

FOOD INFLATION IN SOUTH AFRICA: SOME IMPLICATIONS FOR ECONOMIC POLICY

This paper analyses the trends in food price movements in South Africa between 1980 and 2008. There are three main results emanating from the analysis in this paper. Firstly, food price movements have played a large role in generating inflationary episodes in South Africa. Secondly, while external influences do matter, South African food price movements are mainly due to domestic influences. This implies that national policy has an important role to play in taming domestic food price inflation. Thirdly, given the strong second round impacts, food price movements warrant special attention in monetary policymaking. Core measures of inflation that exclude food price movements may not accurately reflect the underlying inflationary pressures in the economy and could compromise the attainment of the goal of price stability.     

LOCAL TAXATION IN SOUTH AFRICA

"We are most of us profoundly uninterested in municipal affairs." Maud.
T his paper questions the rationale of the South African system of local taxation. It is argued that our system has too narrow a tax base-fixed property-to supply the needs of the modern city; that property taxation is iniquitous in its effects upon taxpayers; and that today it is being applied to finance categories of expenditure for which a tax on property was never intended. Some new thinking is required to devise a system that would supply a closer link between financial requirements and ability to pay.     

MONETARY POLICY IN RWANDA: A COINTEGRATION ANALYSIS

Countries in Africa are increasingly becoming similar in outlook, especially as regards monetary policy. With a view to conducting a long‐term study of monetary policy in Africa, we apply an empirical test for the coherence of inflation targeting, first conducted by Nell (2003 ) for South Africa, to data from Rwanda. We find that like South Africa, Rwanda has a stable money demand function and the adoption of an inflation target is a wise policy option. Also, the Rwandan money market needs just over five quarters to eliminate half of any monetary disequilibrium. These results are of some interest to economists and policy makers for all the countries in the increasingly interconnected continent of Africa.     

DYNAMIC EFFECTS OF MONETARY POLICY SHOCKS IN MALAWI

This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country's monetary transmission process. In the post‐1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened, and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism.     

FINANCIAL AND MONETARY AUTONOMY AND INTERDEPENDENCE BETWEEN SOUTH AFRICA AND THE OTHER SACU COUNTRIES

The paper uses cointegration and error correction modelling techniques together with tests of weak exogeneity, and monthly interest rates for the period 1990 to 2005, to examine the degree of financial and monetary autonomy and interdependence between South Africa and the other Southern African Customs, Union (SACU) countries. The results reveal a high level of dependence of the other SACU countries' financial systems on South Africa's financial system, which suggests that a monetary unification with a single central bank (South African Reserve Bank) and monetary policy for the union is feasible.