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Volatile Capital Flows and a Route to Financial Crisis in South Africa

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  • McKenzie, Rex
  • Pons-Vignon, Nicolas

Abstract

Abstract This is a review article; its purpose is to support a debate on the use of the best available economic theory and evidence in monetary policy in contemporary South Africa. In order to do so, I contrast South Africa's laissez-faire management of capital flows with the experience of other countries where the authorities have opted to use capital control techniques of one type or another. The empirical evidence is fairly substantial, capital control techniques can play a useful part in staving off fragility and financial crisis in the event of sharp surges in capital flows. The key idea is that capital control techniques would offer the authorities more freedom and flexibility in the management of capital flows and the pursuit of monetary policy. The article follows on from Mohammed (2010) who concludes that South African policy makers have not yet learned the relevant lessons stemming from their neoliberal embrace. This article takes up that theme and uses macroeconomic data to show that without capital controls South Africa courts a financial crisis that can be transmitted via any one of at least three channels.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40119.

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Date of creation: Feb 2012
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Handle: RePEc:pra:mprapa:40119

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Keywords: monetary policy; capital flows; capital controls;

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  1. Rex A. McKenzie, 2011. "Casino Capitalism with Derivatives: Fragility and Instability in Contemporary Finance," Review of Radical Political Economics, Union for Radical Political Economics, vol. 43(2), pages 198-215, June.
  2. Juan Antonio Montecino & Jose Antonio Cordero, 2010. "Capital Controls and Monetary Policy in Developing Countries," CEPR Reports and Issue Briefs 2010-10, Center for Economic and Policy Research (CEPR).
  3. Robert Pollin & Gerald Epstein & James Heintz & LĂ©once Ndikumana, 2006. "An Employment-targeted Economic Programme for South Africa," Country Study 1, International Policy Centre for Inclusive Growth.
  4. Jeffrey Frankel, 2007. "On The Rand: Determinants Of The South African Exchange Rate," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 425-441, 09.
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