IDEAS home Printed from https://ideas.repec.org/a/trp/01jefa/jefa0062.html
   My bibliography  Save this article

Examining the Dynamic Nexus of Monetary and Fiscal Policy in South Africa: Evidence from Key Macroeconomic Economic Indicators

Author

Listed:
  • Eugene Msizi BUTHELEZI

    (University of Free State)

Abstract

This paper examines the dynamic nexus of monetary and fiscal policy in South Africa with evidence from key macroeconomic economic indicators from 2000 quarter 1 to 2022 quarter 3. The Markov-switching dynamic regression is used in the Taylor theoretical framework. The contemplation is what type of monetary and fiscal policy mix in a different state of policy rate or repo rate. There is less attention to the analysis of the impact of fiscal policy macroeconomic variables in a different state of policy rate with the consideration of the lower bound and upper bound rate of inflation. The South Africa Reserve Bank's reaction to fiscal policy macroeconomic variables is significant in different states. Moreover, there is evidence of constant reaction of the South Africa Reserve Bank when inflation is at the lower and upper bound. The increase in the gross domestic product gap and inflation gap results in an increase in the rope rate. The result suggests that the monetary policy provided a supportive policy to fiscal policy macroeconomic variables. However, there is a state that reflects trade-offs in the current monetary and fiscal policy mix reaction. The fiscal policy needs to be adjusted to attain the desired target.

Suggested Citation

  • 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.
    • Handle: RePEc:trp:01jefa:jefa0062
    DOI: 10.1991/jefa.v7i1.a57
    as

    Download full text from publisher

    File URL: https://ojs.tripaledu.com/jefa/article/download/80/91
    Download Restriction: no
    File URL: https://libkey.io/10.1991/jefa.v7i1.a57?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Davig, Troy & Leeper, Eric M., 2011. "Monetary-fiscal policy interactions and fiscal stimulus," European Economic Review, Elsevier, vol. 55(2), pages 211-227, February.
    2. Xu, Libo & Serletis, Apostolos, 2016. "Monetary and fiscal policy switching with time-varying volatilities," Economics Letters, Elsevier, vol. 145(C), pages 202-205.
    3. repec:eme:reps00:reps-03-2019-0033 is not listed on IDEAS
    4. Wang, Ling, 2018. "Monetary-fiscal policy interactions under asset purchase programs: Some comparative evidence," Economic Modelling, Elsevier, vol. 73(C), pages 208-221.
    5. Çebi, Cem, 2012. "The interaction between monetary and fiscal policies in Turkey: An estimated New Keynesian DSGE model," Economic Modelling, Elsevier, vol. 29(4), pages 1258-1267.
    6. Alberto Alesina & Carlo Favero & Francesco Giavazzi, 2019. "Effects of Austerity: Expenditure- and Tax-Based Approaches," Journal of Economic Perspectives, American Economic Association, vol. 33(2), pages 141-162, Spring.
    7. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea & Treibich, Tania, 2015. "Fiscal and monetary policies in complex evolving economies," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 166-189.
    8. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    9. António Afonso & José Alves & Raquel Balhote, 2019. "Interactions between monetary and fiscal policies," Journal of Applied Economics, Taylor & Francis Journals, vol. 22(1), pages 132-151, January.
    10. Ahmad, Saad, 2016. "A multiple threshold analysis of the Fed's balancing act during the Great Moderation," Economic Modelling, Elsevier, vol. 55(C), pages 343-358.
    11. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    12. Karamysheva, Madina, 2022. "How do fiscal adjustments work? An empirical investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    13. Taofeek Olusola Ayinde & Abiodun S.Bankole & Oluwatosin Adeniyi, 2020. "Modelling central bank behaviour in Nigeria : A Markov-switching approach," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(4), pages 213-221.
    14. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
    15. Sherine Al-shawarby & Mai El Mossallamy, 2019. "Monetary-fiscal policies interactions and optimal rules in Egypt," Review of Economics and Political Science, Emerald Group Publishing Limited, vol. 4(2), pages 138-157, June.
    16. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
    17. Taylor, John B. (ed.), 2001. "Monetary Policy Rules," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226791258, December.
    18. Cui, Wei, 2016. "Monetary–fiscal interactions with endogenous liquidity frictions," European Economic Review, Elsevier, vol. 87(C), pages 1-25.
    19. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, March.
    20. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    21. Yang, Weonho & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Macroeconomic effects of fiscal adjustment: A tale of two approaches," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 31-60.
    22. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    23. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Caporale, Guglielmo Maria & Helmi, Mohamad Husam & Çatık, Abdurrahman Nazif & Menla Ali, Faek & Akdeniz, Coşkun, 2018. "Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule?," Economic Modelling, Elsevier, vol. 72(C), pages 306-319.
    2. Komlan, Fiodendji, 2013. "The asymmetric reaction of monetary policy to inflation and the output gap: Evidence from Canada," Economic Modelling, Elsevier, vol. 30(C), pages 911-923.
    3. Wollmershauser, Timo, 2006. "Should central banks react to exchange rate movements? An analysis of the robustness of simple policy rules under exchange rate uncertainty," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 493-519, September.
    4. De Fiore, Fiorella & Liu, Zheng, 2002. "Openness and equilibrium determinacy under interest rate rules," Working Paper Series 173, European Central Bank.
    5. Luis Miguel Galindo & Horacio Catalán, 2005. "The Taylor Rule And The Exchange Rate In Mexico (An Empirical Appraisal)," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 4(2), pages 115-125, Junio 200.
    6. Elsayed, Ahmed H. & Naifar, Nader & Nasreen, Samia, 2023. "Financial stability and monetary policy reaction: Evidence from the GCC countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 396-405.
    7. Zisimos Koustas & Jean-François Lamarche, 2012. "Instrumental variable estimation of a nonlinear Taylor rule," Empirical Economics, Springer, vol. 42(1), pages 1-20, February.
    8. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2013. "Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?," Journal of Financial Stability, Elsevier, vol. 9(1), pages 117-138.
    9. Yilmazkuday, Hakan, 2022. "COVID-19 and Monetary policy with zero bounds: A cross-country investigation," Finance Research Letters, Elsevier, vol. 44(C).
    10. Salisu, Afees A. & Gupta, Rangan & Kim, Won Joong, 2022. "Exchange rate predictability with nine alternative models for BRICS countries," Journal of Macroeconomics, Elsevier, vol. 71(C).
    11. Jacek Kotlowski, 2005. "Reaction functions of the Polish central bankers. A logit approach," Working Papers 18, Department of Applied Econometrics, Warsaw School of Economics.
    12. Leitemo, Kai & Soderstrom, Ulf, 2005. "Simple monetary policy rules and exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 481-507, April.
    13. Narek Ohanyan & Aleksandr Grigoryan, 2021. "Measuring monetary policy: rules versus discretion," Empirical Economics, Springer, vol. 61(1), pages 35-60, July.
    14. Christopher Allsopp, 2002. "Macroeconomic Policy Rules in Theory and in Practice," Discussion Papers 10, Monetary Policy Committee Unit, Bank of England.
    15. Teo, Wing Leong, 2009. "Can exchange rate rules be better than interest rate rules?," Japan and the World Economy, Elsevier, vol. 21(3), pages 301-311, August.
    16. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
    17. Colavecchio, Roberta & Carstensen, Kai, 2004. "Did the Revision of the ECB Monetary Policy Strategy Affect the Reaction Function?," Kiel Working Papers 1221, Kiel Institute for the World Economy (IfW Kiel).
    18. Zhu Yanli & Chen Haiqiang & Lin Ming, 2019. "Threshold models with time-varying threshold values and their application in estimating regime-sensitive Taylor rules," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 23(5), pages 1-17, December.
    19. Christopher Adam & David Cobham & Eric Girardin, 2005. "Monetary Frameworks and Institutional Constraints: UK Monetary Policy Reaction Functions, 1985–2003," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(4), pages 497-516, August.
    20. Ozge Senay, 2008. "Interest Rate Rules And Welfare In Open Economies," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(3), pages 300-329, July.

    More about this item

    Keywords

    Fiscal Policy; Monetary Policy; Markov-Switching Dynamic Regression (MSDR).;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:trp:01jefa:jefa0062. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: David Simon Hall (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.