A STOCHASTIC ESTIMATION FRAMEWORK FOR COMPONENTS OF THE SOUTH AFRICAN CONSUMER PRICE INDEX

Under inflation targeting in South Africa, it is important to monitor and forecast changes in prices, not only for aggregate measures of the consumer price index, but also its underlying sub-components. Hypotheses about sectoral transmission of policy and shocks are often more specific than hypotheses about overall transmission. This study employs a stochastic framework to estimate richly specified equilibrium correction models, four-quarters-ahead, for the 10 sub-components of the first targeted measure of the consumer price index, CPIX. The stochastic trends are estimated by the Kalman filter, and interpreted as capturing structural breaks and institutional change, a frequent cause of forecast failure. The trends suggest the design of deterministic split trends for use in recursive forecasting models, towards more accurate overall inflation forecasting. This research also has practical use for monetary policy in allowing identification of sectoral sources of inflation.     

TESTING FOR PPP USING SADC REAL EXCHANGE RATES

This paper attempts to provide evidence indicating that the purchasing power parity (PPP) puzzle is becoming less of a puzzle. It present the results of Augmented Dickey–Fuller test, non-linear tests of non-stationarity and Bayesian unit root tests, applied to 10 Southern African Development Community countries. The Bayesian tests were found to be biased in favour of a trend stationary model in all cases. It is argued that non-linear approaches to exchange rate adjustments are likely to provide a firmer basis for inference and stronger support for the PPP in the long-term. This is more so at 1 and 5% levels of significance.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: EVIDENCE FROM PANEL SURADF TEST

This study reexamines the validity of long-run purchasing power parity (PPP) hypothesis using a battery of panel unit root tests for 11 developing countries in Africa over the period 1980-2007. Based on the conventional panel unit root tests, we found evidence that the monthly real exchange rates in these countries were mean reverting. By contrast, the series-specific unit root test proposed by Breuer et al. (SURADF) reveals that only six of the 11 RERs series were stationary using the US dollar as reference currency. Additionally, our results reveal that there is stronger evidence of the parity condition with the Rand-based rates than in the other currency-based rates like the US dollar or Euro. We conclude that PPP holds in some, but not all, of the African countries according to the SURADF tests.     

MODELLING SOUTH AFRICAN CURRENCY CRISES AS STRUCTURAL CHANGES IN THE VOLATILITY OF THE RAND

This study tests the theory that currency crises are associated with sudden large changes in the structure of foreign exchange market volatility. Due to increases in market uncertainty, crisis periods exhibit abnormally high levels of volatility. By studying short-term changes in volatility dynamics, it is possible to identify the start and end dates of crisis periods with a high degree of precision. We use the iterative cumulative sum of squares algorithm to detect multiple shifts in the volatility of rand returns between January 1994 and March 2009. Dummy variables controlling for the detected shifts in variance are incorporated in a generalised autoregressive conditional heteroscedasticity modelling framework. The analysis indicates that previously identified crisis periods in the rand coincide with significant structural changes in market volatility.     

Does Voter Turnout Influence School Bond Elections?

This article investigates the role of voter turnout in school bond election outcomes. It is widely believed that turnout is negatively related to bond approval rates. Conclusions from previous empirical research, however, may be misleading because many sociodemographic factors and election parameters that influence bond support are also likely to influence voter turnout decisions. To account for the endogeneity of turnout, we employ an instrumental variable approach. We find that the persistent part of voter turnout plays a negligible role in explaining bond approval shares conditioned on election timing, past voting behavior, and district characteristics. Using first‐difference models, change in turnout has a negative and significant influence on change in approval share and probability of bond success. Our results support previous research and suggest that targeted voter mobilization strategies have the potential to influence school bond outcomes.     

Inflation and Structural Change in 50 Developing Countries

This study provides evidence on whether the inflation rate is stationary or nonstationary using quarterly inflation rate data from 50 developing countries. As Johansen [Johansen, Soren. “Testing Weak Exogeneity and Order of Cointegration in UK Money Demand Data,” Journal of Policy Modeling, 14, 3, June 1992, pp. 313–334] put it, “some time series such as the log of prices (P), have the property that even the inflation rate ΔP is nonstationary, whereas the second difference Δ²P is stationarity.” Results from fractional integration analyses provide evidence of long memory and confirm that the nonstationarity threshold of d³0.5 is satisfied in the majority of the cases. Results from recursive analyses indicate that, despite the finding that structural changes influence the behavior of the estimated integration parameters, evidence of long memory and nonstationarity can be found in each subsample as well as the full sample data.     

HIGH AND VARIABLE INFLATION: FURTHER EVIDENCE ON THE FRIEDMAN HYPOTHESIS

This note, employing a GARCH model, finds a positive and significant relationship between the level and variability of inflation in South Africa in the period 1957:1‐2005:9. This provides evidence in support of Friedman's hypothesis that high inflation leads to more variable inflation.     

DEMAND FOR MONEY AND EXPENDITURE COMPONENTS IN SOUTH AFRICA: ASSESSMENT FROM UNRESTRICTED ERROR-CORRECTION MODELS

The main aim of this study is to examine empirically the long‐run relationship of money demand and its determinants in South Africa. In contrast with existing studies on the subject, the present study considers various components of real income as determinants. The disaggregated components are final consumption expenditure, expenditure on investment goods and exports. The other determinants are domestic interest rate, yield on government bonds and the exchange rate. The results confirm that the different components of real income have different impacts on the demand for money in South Africa. The presence of long‐run equilibrium relationships between the demand for real M1, M2 and M3 and their determinants is confirmed based on the results of bounds testing.     

DURATION ANALYSIS IN SOUTH AFRICA: THE SEARCH FOR SUPERIOR MEASURES

The Macaulay duration is a highly successful tool for measuring and managing interest rate risk. However, it employs restrictive assumptions which constrain its usefulness in a rapidly evolving market. The Basel II implementation and ongoing accounting standard reassessments highlight the requirement for accurate, robust risk measures. Contemporary research has focused on augmenting the existing duration definition. We extend this work by relaxing some input assumptions, describing a different duration measure and applying it to interest rate driven price changes and examining the influence on the duration gap. The economic market value of equity (an important metric for regulators and risk management) is significantly improved.     

Does purchasing power parity survive political shocks in South Africa?

Does Purchasing Power Parity Survive Political Shocks in South Africa? — The objectives of the paper are to examine the Purchasing Power Parity (PPP) hypothesis for the South African economy during the period 1975–1994 using high-frequency data. The analysis is conducted both for the entire period and also for different subperiods in order to take into account possible structural changes. For the rand/ dollar exchange rate, the authors find on the basis of a unique long-run cointegrating relationship that there is significant evidence supporting the PPP hypothesis for the entire period. The use of nonlinear least squares and Johansen-Juselius procedures is made to reach the above conclusion.     

A fractional cointegration approach to empirical tests of PPP: New evidence and methodological implications from an application to the Taiwan/US dollar relationship

A Fractional Cointegration Approach to Empirical Tests of PPP: New Evidence and Methodological Implications from an Application to the Taiwan/ US Dollar Relationship. —This paper applies a relatively new concept of fractional cointegration to shed some light on the validity of purchasing power parity as a long-run equilibrium condition, using the Taiwan/US dollar exchange rate. Findings suggest that, while standard tests of cointegration fail to support cointegration between nominal exchange rates, domestic and foreign prices, the fractional cointegration analysis permits deviations from equilibrium to follow a fractionally integrated process and hence captures a much wider class of parity or mean-reversion behaviour. The paper concludes by indicating areas in which fractional cointegration will be a particularly appropriate technique to unearth previously unfounded temporal characteristics.     

MACROECONOMIC UNCERTAINTY AND AGGREGATE PRIVATE INVESTMENT IN SOUTH AFRICA

This paper investigates the effects of time varying uncertainty on aggregate private fixed investment in South Africa. The GARCH generated measures of volatility of selected macroeconomic variables indicating five measures of uncertainty are used in the analysis. These are output growth uncertainty, uncertainty about changes in the real effective exchange rate, uncertainty about changes in the real interest rate, producer inflation uncertainty, and terms of trade uncertainty. The results of the estimation by an empirical ECM model of conventional investment determinants controlling for the effects of uncertainty indicated that, over all, time varying macroeconomic uncertainty significantly reduces private fixed investment.     

The Effect of Homework on Exam Performance: Experimental Results from Principles of Economics

We assess the effect of the completion of online homework assignments on exam performance in “Principles of Economics” using a unique experimental method. For specific homework assignments we randomize students into two groups: those for whom the assignment is optional and those for whom it is required. This randomization, which affects incentives to complete the homework assignment for a particular topic, generates an instrument that helps identify the effect of homework completion on topic‐specific exam performance. Results of the instrumental variables analysis, as well as results of a variety of other analyses, indicate that the completion of the assigned homework is positively (if not always significantly) correlated with higher scores on the midterms but not on the final exam—indicating “decay” in the homework effect over the course of the semester.     

INFLATION IN SOUTH AFRICA: A TIME‐SERIES VIEW ACROSS SECTORS USING LONG‐RANGE DEPENDENCE

In this paper I examine the time‐series evolution of the log consumer price index series in South Africa, disaggregating the data by sectors. I examine the time period 1990m1‐2008m12, i.e. focusing on the post‐apartheid period. I used methodologies based on fractional integration using parametric and semiparametric techniques. The results indicate that the (total) inflation rate in South Africa is long memory, with an order of integration in the range (0, 0.5). The same happens with most of the data disaggregated by sectors with values of d above 1 in the log prices. Evidence of I(0) inflation is obtained in some cases for “fruits and nuts”, “vegetables” and “sugar”, and evidence of mean reversion in the log prices is only obtained in the case of “fish and other seafood”.     

USING THE HIERARCHICAL LINEAR MODEL TO UNDERSTAND SCHOOL PRODUCTION IN SOUTH AFRICA

The emphasis placed in the existing South African school production function literature on better skilled teachers and better school management is discussed. Ordinary least squares and hierarchical linear production function models, using 2000 SACMEQ data, for the country and for a sub‐set of historically disadvantaged schools, are constructed. Ways of making the results more readable for policymakers are explored. The importance of physical infrastructure, textbook and nutrition budgets is highlighted by the models. Correct allocation of teaching and management time in schools, less learner repetition, and better teaching methodologies stand out as important school and classroom management imperatives.     

THE ROLE OF COMMODITY TERMS OF TRADE IN THE DETERMINATION OF THE REAL EXCHANGE RATES OF THE MEDITERRANEAN COUNTRIES

The aim of this paper is to investigate whether there exists a long‐run relationship between the real exchange rate and the commodity terms of trade in the so‐called Mediterranean or MENA countries. These economies are good candidates for this type of formulation, as are commodity exporting countries. Using cointegration techniques, we find long‐run relationships linking the real exchange rate and a commodity‐based measure of the terms of trade. Therefore, commodity terms of trade are a potential explanation for the apparent nonstationarity of MENA countries’ real exchange rates previously found in the empirical literature.     

THE SOUTH AFRICAN AGGREGATE PRODUCTION FUNCTION: ESTIMATION OF THE CONSTANT ELASTICITY OF SUBSTITUTION FUNCTION

This paper assesses the validity of the constant elasticity of substitution (CES) and the Cobb-Douglas (CD) production functions in modelling the aggregate production function and computing the total factor productivity (TFP) in South Africa for the period 1970-2006. The CES function is estimated with Nerlove's two-step procedure using the autoregressive distributed lag (ARDL) cointegration and the Kalman filter estimation techniques, while the CD production function is estimated using the Kalman filter technique. The results of the forecast performance of the two model specifications show that the CD specification outperforms the CES for the period 1970-2006, although the CD specification may be too restrictive.     

PURCHASING POWER PARITY IN AFRICAN COUNTRIES: FURTHER EVIDENCE FROM FOURIER UNIT ROOT TESTS BASED ON LINEAR AND NONLINEAR MODELS

This paper examines the validity of purchasing power parity hypothesis for 33 African countries using recently developed Fourier unit root tests by Christopoulos and León‐Ledesma that account for the existence of multiple breaks in the real exchange rates. The results support the evidence of the PPP in 20 countries, showing that most of the real exchange rates in the selected countries are characterised by linear or nonlinear stationary around multiple temporary mean changes.     

FACTORS INHIBITING DEFLATIONARY BIAS IN CURRENCY BOARD ECONOMIES: EVIDENCE FROM THE COLONIAL ERA

A traditional criticism of currency boards is that they impart a deflationary bias to growing economies. Three factors, however, may inhibit the bias: increases in the velocity of money; increases in the monetary base, which under a currency board occur only through balance-of-payments surpluses; and increases in the money multiplier. This article investigates each of the factors in Fiji, Ghana, Jamaica and Malaya over various periods near the end of the colonial era. Except in Malaya, where the money multiplier declined, all helped prevent deflationary outcomes. In broad terms, growth in the monetary base was the most important.