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Impact of South Africa’s Monetary Policy on the LNS Economies

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Author Info

  • Ikhide, Sylvanus

    ()
    (University of Fort Hare)

  • Uanguta, Ebson

    (Bank of Namibia)

Abstract

The countries in the Common Monetary Area (CMA), South Africa, Lesotho, Namibia and Swaziland, have harmonised their monetary and exchange rate policies in a quasi-monetary union since 1990. Lesotho, Namibia and Swaziland (LNS) have pegged their currencies to the South African Rand thus effectively surrendering monetary policy to the South African reserve bank. The arrangement has resulted in benefits in the form of lower prices, economy on trading costs, and a large increase in trade volume and cross-border financial transactions. However, one cost that has confronted the LNS economies in this monetary arrangement is the loss of independent monetary policy decision-making for stabilisation purposes. This study applies VAR to trace the impact of South Africa Reserve Bank°Øs (SARB) monetary policy on the LNS economies. Specifically, the study examines how a change in the policy instrument of the Reserve Bank of South Africa affects money, credit and level of prices in the LNS economies and consequently assesses the capability of these economies to undertake independent monetary policy. Both the impulse response functions and the cumulated forecast errors show that the lending rates, level of prices and money supply respond instantaneously to changes in the repo rate by the South African reserve bank. Our analysis confirms that the South African repo rate is the relevant policy instrument for these economies as opposed to the LNS countries’ central bank rates. The study concluded that under the existing monetary arrangement, the LNS economies may not be able to undertake independent monetary policy.

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Bibliographic Info

Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 25 (2010)
Issue (Month): ()
Pages: 324-352

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Handle: RePEc:ris:integr:0507

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Web page: http://econo.sejong.ac.kr/
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Keywords: Monetary Policy; Transmission Mechanism; Monetary Integration;

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