The Cyclicality of Monetary and Fiscal Policy in South Africa Since 1994

Abstract

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. Copyright (c) 2007 The Authors; Journal compilation (c) 2007 Economic Society of South Africa.

Enhancing the accuracy of fiscal projections in South Africa

“…Burger, Stuart, Jooste & Cuevas (2012) show that the South African government maintained a sustainable fiscal policy since 1946 by reducing the primary deficit or increasing the primary surplus in response to rising debt. While there is some evidence of procyclical spending during the boom years of the mid-2000s, South Africa has generally avoided destabilising pro-cyclical fiscal policy during the past three decades (Du Plessis, Smit & Sturzenegger, 2007). The second factor is the overall quality of fiscal management, including the , 1999), which aims to address various dimensions of the accountability aspect of fiscal transparency.…”

The economics of apartheid: An introduction

“…The focus therefore shifted to the macroeconomy (Du Plessis et al 2007) and to using new individual level data sets that for the first time provided information on the entire population. The aim was to improve living standards for the previously disadvantaged (Bhorat & Hodge 1999;Klasen 2000;Leibbrandt et al 2000;Carter & May 2001).…”

Fiscal and monetary policy in a commodity‐based economy1

“…Du Plessis, Smit and Sturzenegger (2007, forthcoming) use a structural VAR to estimate potential output and business cycles as well as to unveil the cyclicality of monetary and fiscal shocks as well as the relation among them. Figure 1, taken from their work, shows how the three variables respond to supply, fiscal and monetary shocks for two samples, one starting in 1960 and one starting in 1983.…”

“…From the model, Du Plessis, Smit and Sturzenegger (2007) compute the contribution of each policy shock to GDP and then estimate the relation between the two actual shocks. Their results are shown in Table 1 and Figure 2, where they compute the correlation between monetary and fiscal shocks with GDP (they use the post‐1983 sample).…”