Evaluating South African Fiscal and Monetary Policy Trade‐offs Using a Wavelet‐Based Model

Abstract

The balance between South African fiscal and monetary policy in an open economy context poses some interesting questions for policymakers: questions such as whether more aggressive monetary or fiscal policy will likely deliver better growth prospects in the short and medium run, and what will the consequences be for the real exchange rate and for inflation? This research applies wavelet analysis to post‐apartheid South African quarterly macroeconomic data, and uses the decomposition to simulate a large state‐space linear‐quadratic tracking model. We find that restricted fiscal policy is the best option to realise growth, leading to lower interest rates, lower inflation, real exchange depreciation and improved trade balances compared to restricted monetary policy.

Monetary policy objectives and economic outcomes: What can we learn from a wavelet‐based optimal control approach?

“…The model derives from the widely accepted macroeconomic accelerator framework that has been employed by Kendrick (1981), Kendrick and Shoukry (2014), Crowley and Hudgins (2015, 2018a, 2018b).…”

“…One additional aspect of the system that aids in policy assessment and implementation is that the model penalizes policymakers for large changes between policy variables between periods, as in Crowley and Hudgins (2018a, 2018b). The government is penalized for large changes in spending between periods, which reflects the reality of traditional incremental budgeting, rather than zero‐based budgeting.…”

“…The first open-economy wavelet-based control models were developed as partial accelerator models byCrowley and Hudgins (2018a) andHudgins and Crowley (2019), which analyzed various policy simulations using South African data as a developing country example Crowley and Hudgins (2021a). then examined the performance of the Taylor rule within the context of WBC model, and this was extended further byCrowley and Hudgins (2021b) by the incorporation of unemployment into the framework using Okun's Law.…”

Economic Development and South Africa: 25 Years Analysis (1994 to 2019)

“…Besides, developed nations are inclined to achieve sustainable growth and development (Rodrik, 1997; Jänicke, 2012; Chaminuka et al ., 2019). A visionary approach towards economic development predicts effective investment opportunities for stakeholders along with sustainable societal enhancements can prove beneficial (Manaliyo and Muzindutsi, 2013; Mago and Chitokwindo, 2014); efficient intellectual capital with appropriate usage of technology can bring prosperity (Sulaiman and Aluko, 2015; Meyer et al ., 2017a, 2017b; Meyer and McCamel, 2017); measure to eliminate poverty, minimise unemployment and income inequalities are desirable (Gupta and Modise, 2012, 2013; Gunter and Massey, 2020); optimal utilization of available human resources with fairness and dignity can contribute significantly (Crowley and Hudgins, 2018; Dunne and Kasekende, 2018). Mmopelwa et al .…”

“…Moreover, sustainable economic development is very well connected to secure democratic development and safeguarding of human rights (Makhura and Wasike, 2003; Finnemore et al ., 2004; Chaminuka et al ., 2008; Cheteni, 2013; Carmody, 2019; Kollamparambil, 2020). The research towards the economic analysis of a country or nation is gaining momentum gradually (Crowley and Hudgins, 2018; Dunne and Kasekende, 2018; Olawumi Israel‐Akinbo et al ., 2018). The economic stability has a direct impact on the growth and development of a nation, and South Africa is not an exception in this respect (Santangelo, 2018; Carmody, 2019).…”