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

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  • Patrick M. Crowley
  • David Hudgins

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.

Suggested Citation

  • Patrick M. Crowley & David Hudgins, 2018. "Evaluating South African Fiscal and Monetary Policy Trade‐offs Using a Wavelet‐Based Model," South African Journal of Economics, Economic Society of South Africa, vol. 86(4), pages 401-427, December.
    • Handle: RePEc:bla:sajeco:v:86:y:2018:i:4:p:401-427
    DOI: 10.1111/saje.12206
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    Cited by:

    1. Crowley, Patrick M. & Hudgins, David, 2019. "U.S. Macroeconomic Policy Evaluation in an Open Economy Context using Wavelet Decomposed Optimal Control Methods," Bank of Finland Research Discussion Papers 11/2019, Bank of Finland.
    2. Pavitra Dhamija, 2020. "Economic Development and South Africa: 25 Years Analysis (1994 to 2019)," South African Journal of Economics, Economic Society of South Africa, vol. 88(3), pages 298-322, September.
    3. Eugene Msizi BUTHELEZI, 2023. "Examining the Dynamic Nexus of Monetary and Fiscal Policy in South Africa: Evidence from Key Macroeconomic Economic Indicators," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 7(1), pages 13-42.
    4. Patrick M. Crowley & David Hudgins, 2022. "Monetary policy objectives and economic outcomes: What can we learn from a wavelet‐based optimal control approach?," Manchester School, University of Manchester, vol. 90(2), pages 144-170, March.
    5. repec:zbw:bofrdp:2019_011 is not listed on IDEAS
    6. Crowley, Patrick M. & Hudgins, David, 2019. "U.S. Macroeconomic Policy Evaluation in an Open Economy Context using Wavelet Decomposed Optimal Control Methods," Research Discussion Papers 11/2019, Bank of Finland.

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