Monetary policy transmission in South Africa: a comparative analysis of credit and exchange rate channels
- Authors: Sebitso, Nathaniel Maemu
- Date: 2011
- Subjects: Monetary policy -- South Africa , Foreign exchange market -- South Africa , Financial crises -- South Africa , South Africa -- Economic conditions , South Africa -- Economic policy , Banks and banking -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1129 , http://hdl.handle.net/10962/d1020851
- Description: This thesis focuses on monetary policy transmission and particularly seeks to examine the impact of credit and exchange rate channels of monetary policy transmission in the South African economy. South Africa's monetary policy has gone through several changes over the past thirty years. In this respect, there is a need for robust empirical evidence on the effects of these channels on inflation and output. The thesis employs a structural vector autoregressive (SVAR) model to identify monetary transmission in South Africa for the period 1994:q4 - 2008:q2. The form of the SVAR used in this thesis is based on the fact that South Africa is a small open economy, which means that external shocks are an important driver of domestic activity. The impulse responses and variance decomposition results show that the repo rate, credit and exchange rate play a role in terms of their impact on inflation and output. The dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the importance of the interest rate channel. A shock to the interest rate, increasing it by one standard deviation, results in a persistent fall in credit. The response of output is immediate as it falls and bottoms out within the second year. Inflation shows a lagged response, it is positive within the first year as the exchange rate depreciates but in subsequent quarters inflation responds negatively as expected. Inflation falls and reaches a minimum by approximately eight quarters then moves towards baseline. The exchange rate shows delayed appreciation. The shock to the repo interest rate leads to an immediate depreciation of the exchange rate in the first two quarters as output declines, followed by an appreciation in the third and sixth quarter. Due to larger error bounds the impact of the repo rate on the exchange rate could be less effective within the first two years. The impulse responses suggest that monetary policy plays an effective role in stabilising the economy in response to a credit shock, notwithstanding large standard error bounds. Hence, the monetary authority reacts by increasing the repo rate as a result of inflation. The impact of credit on output is positive but is offset to some extent by the rising repo rate. In response to the rand appreciation, the monetary authority reduces the repo rate significantly during the first year with the maximum impact in the second year and then returns to baseline thereafter. Therefore the monetary authority reduces the repo rate, probably to stabilise falling inflation. The result shows that inflation falls as a result of the rand appreciation. A shock to the exchange rate causes a rise in output, though small in magnitude, which is persistent but reaches baseline at the end of the period. This result could reflect the effects of the resultant fall in the repo rate and a persistent rise in credit over the whole period, which tends to increase output. The exchange rate shows an obvious and stronger immediate impact on inflation compared to credit impact on inflation. However, the credit shock has an obvious and stronger impact on output compared to an exchange rate impact on output. However, the large standard error bounds may imply that credit and exchange rate channels are not as effective in the short run. It is important to note that the results are based on the SVAR model estimated with percentage growth rate of the variables. The variance decomposition result is in line with the impulse responses and shows that the exchange rate and credit channels could be important transmission channels in South Africa over the chosen sample period. The exchange rate and credit shocks show a stronger effect on inflation than on output, looking at both the impulse responses and variance decomposition results. The reaction of the repo interest rate to the credit and exchange rate shocks comes out as expected. The repo rate increases as a result of an increase in the credit and falls as a result of the currency appreciation.
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- Date Issued: 2011
Development of the South African monetary banking sector and money market
- Authors: Patel, Aadil Suleman
- Date: 2005
- Subjects: South African Reserve Bank , Banks and banking -- South Africa , Money market -- South Africa , Economic development -- South Africa , Monetary policy -- South Africa , South Africa -- Economic conditions , Financial institutions -- South Africa , Money -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:997 , http://hdl.handle.net/10962/d1002732 , South African Reserve Bank , Banks and banking -- South Africa , Money market -- South Africa , Economic development -- South Africa , Monetary policy -- South Africa , South Africa -- Economic conditions , Financial institutions -- South Africa , Money -- South Africa
- Description: This thesis presents a theoretical analysis of developments in the South African monetary banking sector and money market. In the first section, evolution of the political, social and economic environments over the past few decades are discussed to provide the reader with an idea of some factors responsible for the underdeveloped nature of this market. It has been argued that the domestic political and economic landscape is relatively stable. Nevertheless, factors such as Zimbabwe’s political and ensuing economic turmoil, coupled with numerous financial crises in other developing nations have had negative consequences on domestic financial market development and economic growth. The current state of monetary policy is also analysed, within the economic environment, and various policy considerations have been put forth concerning the inflation targeting policy. The thesis then goes on to scrutinise the statutory and institutional environments within which the monetary banking institutions operate. Recent changes in the regulations governing the operations of these institutions are identified, together with the consequences of such laws on banking institutions and possible amendments have been suggested. In particular, a system of Asset Based Reserve Requirements (ABRR) has been recommended, in place of the current cash reserve requirement, to ensure regulators create a level playing field in the financial sector. The system can also provide authorities with the necessary control required to direct funds to the most desirable sectors of the economy. Development of the interbank market and the effect of reduced banking competition on the efficacy of the South African Reserve Bank’s refinancing operations and inflation targeting policy are also considered. Finally, the thesis analyses some effects of financial development on the South African economy, and whether it is in the best interests of the country to pursue financial reforms with such vigour. While financial development may bring South Africa closer to international standards of best practice, the timing and extent of the reforms will be critical to guarantee success.
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- Date Issued: 2005
The relationship between interest rates and inflation in South Africa : revisiting Fisher's hypothesis
- Authors: Mitchell-Innes, Henry Alexander
- Date: 2006
- Subjects: Fisher effect (Economics) , Interest rates -- South Africa , Interest rates -- Effect of inflation -- South Africa , Inflation (Finance) -- South Africa , Monetary policy -- South Africa , Banks and banking, Central -- South Africa , South Africa -- Economic conditions
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:991 , http://hdl.handle.net/10962/d1002726 , Fisher effect (Economics) , Interest rates -- South Africa , Interest rates -- Effect of inflation -- South Africa , Inflation (Finance) -- South Africa , Monetary policy -- South Africa , Banks and banking, Central -- South Africa , South Africa -- Economic conditions
- Description: This thesis investigates the relationship between expected inflation and nominal interest rates in South Africa and the extent to which the Fisher effect hypothesis holds. The hypothesis, proposed by Fisher (1930), that the nominal rate of interest should reflect movements in the expected rate of inflation has been the subject of much empirical research in many industrialised countries. This wealth of literature can be attributed to various factors including the pivotal role that the nominal rate of interest and, perhaps more importantly, the real rate of interest plays in the economy. The validity of the Fisher effect also has important implications for monetary policy and needs to be considered by central banks. Few studies have been conducted in South Africa to validate this important hypothesis. The analysis uses the 3-month bankers’ acceptance rate and the 10-year government bond rate to proxy both short- and long-term interest rates. The existence of a long-run unit proportional relationship between nominal interest rates and expected inflation is tested using Johansen’s cointegration test. The data is analysed for the period April 2000 to July 2005 as the research aims to establish whether the Fisher relationship holds within an inflation targeting monetary policy framework. The short-run Fisher effect is not empirically verified. This is due to the effects of the monetary policy transmission mechanism and implies that short-term nominal interest rates are a good indication of the stance of monetary policy. A long-run cointegrating relationship is established between long-term interest rates and expected inflation. The long-run adjustment is less than unity, which can be attributed to the credibility of the inflation-targeting framework.
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- Date Issued: 2006
Interest rate behaviour in a more transparent South African monetary policy environment
- Authors: Ballim, Goolam Hoosen
- Date: 2005
- Subjects: South African Reserve Bank , Monetary policy -- South Africa , Banks and banking -- South Africa , Interest rates -- South Africa , South Africa -- Economic policy , South Africa -- Economic conditions
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1034 , http://hdl.handle.net/10962/d1004462 , South African Reserve Bank , Monetary policy -- South Africa , Banks and banking -- South Africa , Interest rates -- South Africa , South Africa -- Economic policy , South Africa -- Economic conditions
- Description: South Africa introduced inflation targeting as a monetary policy framework in 2000. This marked a sizable shift in monetary policy management from the previous "eclectic" approach and the explicit focus on M3 money supply before that. The study appraises the effectiveness of monetary policy under this new dispensation. However, the analysis does not centre on inflation outcomes, which can be a measure of effectiveness because they are the overriding objective of the South African Reserve Bank in effect, it is possible to have a target-friendly inflation rate for a length of time despite monetary policy that is ambiguous and encourages unpredictability in market interest rates. However, persistent policy opaqueness can, over time, damage a favourable inflation scenario. For instance, if the public is unsure about the Reserve Bank's desired inflation target, price setting in the wage and goods markets may eventually produce an inflation outcome that is higher than the Bank may have intended. Rather, this study adjudicates the effectiveness of monetary policy within the context of policy transparency, which is an intrinsic part of the inflation targeting framework. The study looks at the extent to which monetary policy transparency has enhanced both the anticipatory nature of the market's response to policy actions and the force that policy has on all interest rates in the financial system, particularly long-term rates. These concepts are important because through the transmission mechanism of monetary policy, the more deft market participants are at anticipating future Reserve Bank policy the greater the Bank's ability to steady the economy before the actual policy event. With the aid of regression models to estimate the response of market rates to policy changes, the results show that there is significant movement in market rates in anticipation of policy action, rather than on the day of the event or the day after. Indeed, the estimates for market rates movement on the day of and even the day after the policy action are generally minute. For instance, the R157 long-term government bond yield changes by a significant 41 basis points in response to a one percentage point change in the Reserve Bank's benchmark repo rate in the period between the last policy action and the day preceding the current action. In contrast, the R157 bond yield changes by an insignificant 2 basis points on the day of the current repo rate change and about 1 basis point the day after the current change. The results point to a robust relationship between policy transparency and the market's ability to foresee rate action. If this were not the case, it is likely that there would be persistent market surprise and, hence, noticeable movement in interest rates on the day of the rate action and perhaps even the day after. Another important observation is that monetary policy impacts significantly on both short- and long-term market rates. Again, certifying the robustness of monetary policy under the inflation targeting regime
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- Date Issued: 2005
Central Bank policy and the exchange rate under an inflation targeting regime: a case dtudy of South Africa
- Authors: Gonzo, Prosper
- Date: 2013
- Subjects: Foreign exchange rates -- Government policy -- South Africa , Inflation (Finance) -- South Africa , Monetary policy -- South Africa , Banks and banking, Central -- South Africa , South Africa -- Economic conditions , Banking industry -- Finance -- South Africa
- Language: English
- Type: Thesis , Masters , M Com
- Identifier: vital:11476 , http://hdl.handle.net/10353/d1015043 , Foreign exchange rates -- Government policy -- South Africa , Inflation (Finance) -- South Africa , Monetary policy -- South Africa , Banks and banking, Central -- South Africa , South Africa -- Economic conditions , Banking industry -- Finance -- South Africa
- Description: This work examined the optimality of the inclusion of the exchange rate in the reaction function of the Central Bank in an inflation targeting framework. The study attempts to answer the question whether the exchange rate should have an independent role in an open economy Taylor-type rule. To this end, a Taylor-type rule is incorporating the exchange rate is estimated by the cointegration and vector error correction modeling (VECM) using quarterly data for the period of 1995 to 2009. The empirical studies point out the importance of the exchange rates in explaining and forecasting the behaviour of the South African Reserve Bank monetary policy control variable.
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- Date Issued: 2013
The yield curve as a forecasting tool : does the yield spread predict recessions in South Africa?
- Authors: Khomo, Melvin Muzi
- Date: 2006
- Subjects: Recessions -- South Africa , Monetary policy -- South Africa , Economic development -- South Africa , Economic indicators -- South Africa , Business cycles -- History -- 20th century , Business cycles -- South Africa , South Africa -- Economic conditions
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1040 , http://hdl.handle.net/10962/d1004722 , Recessions -- South Africa , Monetary policy -- South Africa , Economic development -- South Africa , Economic indicators -- South Africa , Business cycles -- History -- 20th century , Business cycles -- South Africa , South Africa -- Economic conditions
- Description: This paper examines the ability of the yield curve to predict recessions in South Africa, and compares its predictive power with other commonly used variables that include the growth rate in real money supply, changes in stock prices and the index of leading economic indicators. The study also makes an attempt to find out if monetary policy explains the yield spread's predictive power with regards to future economic activity. Regarding methodology, the standard probit model proposed by Estrella and Mishkin (1996) that directly estimates the probability of the economy going into recession is used. Results from this model are compared with a modified probit model suggested by Dueker (1997) that includes a lagged dependent variable. Results presented in the paper provide further evidence that the yield curve, as represented by the yield spread between 3-month and IO-year government paper, can be used to estimate the likelihood of recessions in South Africa. The yield spread can produce recession forecasts up to 18 months, although it's best predictive power is seen at two quarters. Results from the standard probit model and the modified pro bit model with a lagged dependent variable are somewhat similar, although the latter model improves forecasts at shorter horizons up to 3 months. Compared with other indicators, real M3 growth is a noisy indicator and does not provide much information about future recessions, whilst movements in the All-Share index can provide information for up to 12 months but does not do better than the yield curve. The index of leading economic indicators outperforms the yield spread in the short run up to 4 months but the spread performs better at longer horizons. Based on the results from the study, it appears that changes in monetary policy explain the yield spread's predictive power. This is because the yield spread loses its explanatory power when combined with a variable representing the monetary policy stance of the central bank.
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- Date Issued: 2006
The functioning of the interbank market and its significance in the transmission of monetary policy
- Authors: De Angelis, Catherine
- Date: 2013-06-11
- Subjects: South African Reserve Bank , Monetary policy -- South Africa , Foreign exchange rates -- South Africa , Money market -- South Africa , Banks and banking -- South Africa , Repurchase agreements -- South Africa , South Africa -- Economic policy , South Africa -- Economic conditions
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1075 , http://hdl.handle.net/10962/d1008054 , South African Reserve Bank , Monetary policy -- South Africa , Foreign exchange rates -- South Africa , Money market -- South Africa , Banks and banking -- South Africa , Repurchase agreements -- South Africa , South Africa -- Economic policy , South Africa -- Economic conditions
- Description: Monetary policy in South African is the primary means by which the authorities can influence activity in the overall economy. The South African Reserve Bank accommodates banks through repo transactions for which they charge the repo rate. The most important market in the transmission of the repo rate to the rest of the economy is the interbank market. As such, a detailed discussion of this market is given. In September 200 I the monetary authorities made certain adjustments to the repo system of accommodation, which included changing the repo rate from a floating rate to a fixed rate that would be administratively determined by the MPC. This was done to address certain weaknesses in the floating rate system. This thesis examines and compares the period before and after the adjustments to the repo system, with the aim of determining whether or not the monetary authorities achieved the goals intended from making this change. The repo rate, prime interbank rate, 3-month NCO rate and the prime lending rate are analysed using the Engle-Granger two variable approach and an ECM model to test for causality. It was found that the monetary authorities did not achieve their intended goals as the relationship between the repo rate and the interbank rate was more significant in the first period. Furthermore, the direction of causality the authorities hoped to achieve by implementing the changes were in fact already in place. As such the adjustments to the system changed the transmission mechanism from the one desired by the authorities to one that was not intended. The conclusions reached by this study show that, in terms of the objectives of the monetary authorities, the previous repo system functioned better. , KMBT_363 , Adobe Acrobat 9.54 Paper Capture Plug-in
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