Monetary Policy and the Economy in South Africa

Transcription

1 Monetary Policy and the Economy in South Africa

2 Monetary Policy and the Economy in South Africa Mthuli Ncube African Development Bank Group, South Africa and Eliphas Ndou Reserve Bank of South Africa, Pretoria, South Africa

3 Mthuli Ncube and Eliphas Ndou 2013 Softcover reprint of the hardcover 1st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6 10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act First published 2013 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number , of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin s Press LLC, 175 Fifth Avenue, New York, NY Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress.

4 Contents List of Figures List of Tables Preface Acknowledgments List of Abbreviations viii xi xii xiv xv 1 Introduction: South African Monetary Policy Regimes The exchange rate policy Current account Inflation and economic growth 3 Part I Output 2 Effects of Monetary Policy on Output Introduction VAR methodology Data Empirical results Conclusion 23 3 Inflation Uncertainty and Output Introduction Theory Literature review Econometric methodology Data and descriptive statistics Empirical results Conclusion 38 Part II Housing 4 Monetary Policy Transmission, House Prices and Consumption Introduction Consumption, housing prices and interest rates 46 v

5 vi Contents 4.3 The VAR model Data Results and discussion Conclusion 61 5 Monetary Policy, Disposable Income and Consumption Introduction Data VAR model Results Impact of oil price in the extended model Counterfactual analysis Variance decompositions Conclusions 81 6 Mortgage Variables, Monetary Policy and Consumption Introduction Theory What does international evidence conclude? Data Results Examining the impact of US mortgage variables on South Africa Conclusion 106 Part III Components of the Balance of Payments 7 Monetary Policy and Exchange Rate Shocks on South Africa s Trade Balance Introduction Literature review VAR methodology Data Empirical results Variance decomposition Conclusion Exchange Rate, House Price and Equity Shocks on the Current Account Introduction Review of findings in other countries VAR methodology Data 146

6 Contents vii 8.5 Empirical results Conclusion 154 Part IV International Transmission 9 International Transmission of US Shocks into South Africa Introduction A review of previous empirical analysis VAR methodology Data Results Conclusion 175 Bibliography 177 Index 189

7 List of Figures 1.1 South African current account and trade balance as percentage of GDP South African GDP and inflation rates Linkage between financial conditions, monetary policy and real economy South African financial conditions indices Components of the financial conditions index during its expansionary phase in Components of the financial conditions index during its contractionary phase in Quarterly GDP growth rates and money market interest rates Trends of all variables Shaped posterior distribution of impulse responses Dynamic responses GDP growth versus estimated monetary policy shocks Plots of output and inflation rate Generalized impulse responses: inflation uncertainty and inflation Generalized impulse responses: inflation uncertainty and output growth Loan to value ratios Loan to value ratios according to large mortgages books Relationship between interest rate, housing and consumption Plots of variables Impulse responses to the interest rate and house price shocks Impulse responses to the interest rate from the alternative model Impulse responses to house prices from the alternative model Trends in variables Plot of variables Responses to monetary policy shocks Responses to house price shocks Responses to disposable income shocks 74 viii

8 List of Figures ix 5.6 Responses to inflation shocks Responses to oil price shocks Consumption paths after shutting off disposable income at different dates Components of commercial bank finances (%) Bond amounts according to institutions (billion rands) Values of primary and secondary bonds in South Africa Average values of bonds (million rands) Debt to household income ratios and costs of servicing debt The housing monetary transmission mechanism channel Plots of all variables Monetary policy shocks Mortgage lending shocks Housing price shocks Residential investment shocks US residential investment shocks US house price shocks Real imports and exports as percentage of gross domestic product Plot of variables Exchange rate appreciation and monetary policy shocks Main shocks in the second specification Main shocks using OECD data Main shocks using OECD data in the second model Main shocks on exports and imports in the main model Main shocks on exports and imports in the second model Main shocks, private absorption and equity appreciation shocks Main shocks, private absorption and supply shocks Current account as percentage of GDP and asset prices Current account and net portfolio flows Current account and other variables Plots of variables REER, equity appreciation and housing shocks Main shocks and monetary policy shocks Main shocks and private absorption South African exports to main trading partners Bilateral US and South African investment positions US recession and South African growth Plot of all variables Effects of US M2 expansion shocks 169

9 x List of Figures 9.6 Effects of US contractionary monetary policy shocks Effects of US output shocks Effects of negative trade shocks Effects of portfolio shocks 174

10 List of Tables 2.1 Contractionary monetary policy shock ARCH and unit roots tests Accumulated effects of inflation uncertainty on inflation Results Descriptive statistics Decomposition of variance for series (%) Decreases in consumption in the sixth quarter (%) Unit root test Variance decomposition of consumption variables in five-variable VAR (%) Descriptive statistics Variance decomposition of shocks (%) Forecast variance error decomposition of South African variables (%) Benchmark VAR Modified benchmark VAR identification Descriptive statistics Augmented VAR identification Variance decomposition of various shocks (%) Benchmark VAR identifications of shocks through sign restrictions Descriptive statistics Variance decomposition of various shocks (seven-variable VAR) Description of the variables 166 xi

11 Preface This book is made up of four parts covering output, housing, components of the balance of payments, and international transmission. Different VAR approaches are applied to data in order to assess monetary policy conduct in South Africa. The book uses two Bayesian VAR approaches in the form of sign restrictions and Minnesota priors, in addition it estimates over identified and precisely identified SVARs. Part I examines output in South Africa. Chapter 2 investigates three questions relating monetary policy to the business cycle using a VAR sign restriction approach, dealing in particular with the effect of contractionary monetary policy shocks on output, and the proportions of fluctuations due to contractionary monetary policy shocks relative to other shocks. This chapter also shows some of the actual monetary policy activities that are captured by the approach. Chapter 3 assesses the importance of price stability as a mandate for monetary policy authorities. It assesses the relationships between inflation, inflation uncertainty, output growth uncertainty and output growth variables. This involves testing the impact of inflation uncertainty on inflation to determine whether the central bank pursues stabilization policies (as suggested by Holland 1995) or goes out of its way to be unpredictable and engineer higher inflation, hoping for output gains (Cuikerman and Meltzer 1986). In addition, the study looks at the indirect channel through inflation uncertainty on both real output growth (Friedman 1977) and its uncertainty, which is expected to be negative, according to Taylor (1979), or positive, according to Logue and Sweeney (1981). Part II deals with the real estate sector. Chapter 4 estimates an SVAR and quantifies the percentage decrease in consumption expenditure, attributed to the changes in household wealth, due to a contractionary monetary policy shock in South Africa. This compares the significance of indirect effects relative with direct effects. The indirect channel operates through changes in the interest rates on household wealth, the rising interest rates directly reducing current consumption. The direct channel refers to the effects of interest rates on consumption. Chapter 5 assesses the role of disposable income, inflation and house prices on various categories of consumption. The analysis is extended to assess the impact of oil inflation shocks on real variables. Chapter 6 investigates the role xii

12 Preface xiii of the mortgage market and the impact of spillover effects from the US housing market on the South African economy. This particularly searches for any evidence of a directional push effect from developments in the US housing market on South African counterparts. Part III focuses on the trade balance and current account. Chapter 7 examines the differential effects of contractionary monetary policy and exchange rate appreciation shocks on the trade balance. In addition, the analysis further examines the channels through which monetary policy affects the trade balance. Chapter 8 investigates the economic significances of the exchange rate, house prices and equity price appreciation shocks in explaining current account fluctuations, and seeks to find the dominant shock between the real effective exchange rate, house prices and equity price appreciation shocks in terms of the effect on the South African current account balance. Part IV deals with international spillover effects. Chapter 9 focuses on the transmission of macroeconomic shocks in the United States to the South African economy. This chapter particularly investigates the extent to which macroeconomic fluctuations in South Africa are caused by US shocks. The objective is to demonstrate South Africa s vulnerability.

13 Acknowledgements We would like to thank our colleagues and friends in the South African Reserve Bank research department for their patience and for supplying us with data used in this book. We thank Nombulelo Gumata and Thabo Mokoena at the South African Reserve Bank, and Professor Alain Kabundi, Professor Chris Malikane, and colleagues at the African Development Bank for their helpful comments in reviewing some of the chapters. We also thank the Journal of Housing and Scottish Journal of Political Science for their permission to reproduce the graphs. We are grateful to Tom Doan at Estima for his help with programming and e-course material. We thank colleagues at the European Central Bank, especially Alberto Musso, for his assistance with programming, and at the University of the Witwatersrand. xiv

14 List of Abbreviations ADF AGOA Alsi BFGS BIS CPI-X E-GARCH EMU FAVAR FFR GARCH GARCH-M GDP IFS IMF KPSS MFD MMR MPC NEER NGP OECD OLS PCE PP RBC REER repo SARB SVAR SVECM VAR VECM Augmented Dickey Fuller test African Growth and Opportunity Act All Share Index Broyden Fletcher Goldfarb Shanno algorithm Bank of International Settlements consumer price inflation, excluding mortgage rates exponential generalized autoregressive conditional heteroscedasticity European Monetary Union factor augmented vector autoregression federal funds rate generalized autoregressive conditional heteroscedasticity generalized autoregressive conditional heteroscedasticity-in-mean gross domestic product international financial statistics International Monetary Fund Kwiatkowski Phillips Schmidt Shin test Mundell Fleming Dornbush money market interest rate marginal propensity to consume nominal effective exchange rate New Growth Path Organisation for Economic Co-operation and Development ordinary least squares personal consumption expenditure Phillips Perron test real business cycle real effective exchange rate repo rate or repurchase rate South African Reserve Bank structural vector autoregression structural vector error correction model vector autoregression vector error correction model xv