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

Literature › Works

Stan du Plessis; Ben Smit; Federico Sturzenegger (2008). The Cyclicality of Monetary and Fiscal Policy in South Africa since 1994. CID Working Paper No. 163. Center for International Development, Harvard University.
Type working paper
Scope Post-1994 South African economy
Method econometric
Period studied 1960–2006
Regions South Africa
Themes macro fiscal finance debt, transition post apartheid, methods data sources
Citation key plessis2008a

Argument

Using a three-variable structural VAR (output growth, government consumption/GDP, real interest rate) with Blanchard-Quah long-run restrictions, the paper asks whether monetary and fiscal policy have been pro- or counter-cyclical since 1994. It reviews South African studies based on structural budget balances, fiscal impulses, expenditure ratios and interest-rate responses, finds they disagree, and attributes this to contestable base years, elasticities and cycle measures. The SVAR results show monetary policy to have been largely counter-cyclical since 1994, and fiscal policy to have been pro-cyclical, mainly after 2002. Counterfactual simulations that remove the identified policy shocks suggest that fiscal pro-cyclicality added only modestly to output volatility, while monetary shocks stabilised output or had a neutral effect.

Evidence and method

Seasonally adjusted quarterly SARB data, 1960Q2-2006Q4: real GDP, government consumption to GDP and a real interest rate built from the discount rate and CPI. The paper also uses IFS data for emerging-market comparisons and SARB business-cycle turning points. It draws on results from earlier South African studies (Swanepoel, Du Plessis and Boshoff, Horton, Ajam and Aron) and on budget speeches.

Findings

  • Monetary policy since 1994 has been largely counter-cyclical, confirming the emerging consensus. (p. 2)

    The model confirms the consensus on monetary policy, finding it to have been largely countercyclical since 1994.

  • Fiscal policy shows pro-cyclicality, especially recently, but with little destabilising effect on output. (p. 2)

    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 destabilizing impact on real output.

  • The post-1994 economy has been unusually stable, with a long expansion, a South African 'great moderation'. (p. 5)

    remarkable period of economic stability coupled, since 1999, with the longest business cycle expansion

  • Potential output fell sharply in the two decades before 1994, a decline tied to opposition to apartheid and to transition instability; it reversed after 1994. (p. 7)

    potential output had declined precipitously relative to trend in the two decades prior to 1994, a process associated with the internal and external opposition to the system of Apartheid

  • Governments did not deliberately use fiscal policy counter-cyclically after 1994. (p. 8)

    there is little evidence of fiscal policy being used intentionally as a counter-cyclical policy tool since 1994

  • Du Plessis and Boshoff's revenue elasticities are more than double Swanepoel and Schoeman's, which undermines the earlier conclusion of weak automatic stabilisers. (p. 10)

    the output elasticities of government revenue as estimated by Du Plessis and Boshoff (2007) are more than twice as high as the estimates by Swanepoel and Schoeman (2003)

  • Earlier work finds monetary policy had no cyclical pattern before 1990 and became forward-looking and counter-cyclical afterwards. (p. 18)

    prior to 1990 there was essentially no relationship between the business cycle and the monetary policy cycle, but after 1990 a clear forward-looking counter-cyclical relationship emerges.

  • Since 1994 the correlation of monetary shocks with supply shocks is negative (counter-cyclical) in both models. (p. 26)

    Since 1994 both models show a negative (i.e. counter-cyclical) correlation.

  • Removing fiscal shocks lowers output volatility only modestly in the counterfactual. (p. 28)

    the standard deviation of the changes drops for the period 1994 through 2006 from 0.49 to 0.42 in the short sample, and from 0.45 to 0.38 in the longer sample

  • A prior counterfactual attributes over half of the improved post-1994 stability to more systematic monetary policy. (p. 28)

    They found that 55% of the improved stability in terms of output and inflation variability, could be attributed to a more systematic monetary policy over this period

  • Fiscal pro-cyclicality is confined to the period since 2002, an exceptional cycle phase, so the conclusion needs caution. (p. 29)

    closer scrutiny of the evidence suggests that the observed pro-cyclicality is all due to the period since 2002.