Are the Amplification Effects of Positive Shocks to SARB Assets Growth and Forex Reserves Accumulation on Long-Term Yields Dependent on Government Debt Growth Regimes?

Do government debt regimes impact the effects of large-scale asset purchases (LSAPs)? We find that government debt growth regimes matter for the response of ten-year government bond yields, interest costs, R/US$ exchange rate and inflation. Long-term government bond yields, interest costs and inflation increase more in response to positive shocks to government debt growth in the high-debt regimes compared to the low-debt growth regimes. However, the R/US$ exchange rate depreciates (appreciates) in the high (low) debt growth regimes. Furthermore, we establish that foreign currency reserves accummulation amplify the decline in bond yields, interest costs and inflation more in the low-debt growth regimes compared to the high-debt growth regimes. Similarly, in the high-debt growth regimes, foreign currency reserves accummulation dampen the appreciation of the R/US$ exchange rate. The ten-year bond yields decline but the impact of LSAPs is neutralised in high-debt growth regimes compared to those in low-debt growth regimes. Thus, government debt regimes matter for the impact of foreign currency reserves accumulation and LSAPs on government yields and interest costs. The policy implication is that a policy strategy that contains growth in government debt growth below 10 per cent, coupled with the foreign currency reserves accumulation and LSAPs by the SARB, will have a positive effect on long-term government bond yields and interest costs.