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The impact of economic shocks in the rest of the world on South Africa: Evidence from a global VAR

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  • Annari de Waal

    ()
    (Department of Economics, University of Pretoria)

  • Renee van Eyden

    ()
    (Department of Economics, University of Pretoria)

Abstract

The significant change in South Africa’s trade patterns over the past two decades should affect the impact of shocks in the rest of the world on the country, since South Africa is a small open economy. We investigate the effect with the use of a global vector autoregression (GVAR) model from 1979Q2 to 2009Q4. To account for changes in international trade linkages, we assemble the country-specific foreign variables with time-varying trade-weighted data. We show that the long-term impact of a shock to Chinese GDP on South African GDP is 330% stronger in 2009 than in 1995, due to the substantial increase in South Africa’s trade with China since the mid-1990s. By 2005, a United States (US) GDP shock only has a quarter of the long-term impact on South African GDP compared to 1995, as trade with the US declined noticeably. By 2009, the impact of a US GDP shock on South African GDP is insignificant. The results indicate why the recent global crisis did not affect South Africa as much as it affected developed economies. It also stresses the increased risk, to the South African economy and economies in the rest of the world, should China experience slower GDP growth.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201328.

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Length: 26 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:pre:wpaper:201328

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Keywords: South Africa; developing economies; trade linkages; global macroeconomic modelling; global vector autoregression (GVAR);

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References

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  1. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2012. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199650460, October.
  2. Alessandro Rebucci & Ambrogio Cesa-Bianchi & M. Hashem Pesaran & TengTeng Xu, 2012. "China's Emergence in the World Economy and Business Cycles in Latin America," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  3. Dees, S. & di Mauro, F. & Pesaran, M.H. & Smith, L.V., 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0518, Faculty of Economics, University of Cambridge.
  4. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2001. "Modelling regional interdependencies using a global error-correcting macroeconometric model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002, International Conferences on Panel Data B4-1, International Conferences on Panel Data.
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  6. Çakır, Mustafa Yavuz & Kabundi, Alain, 2013. "Trade shocks from BRIC to South Africa: A global VAR analysis," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 190-202.
  7. M. Hashem Pesaran & Til Schuermann & Bjorn-Jakob Treutler, 2007. "Global Business Cycles and Credit Risk," NBER Chapters, National Bureau of Economic Research, Inc, in: The Risks of Financial Institutions, pages 419-474 National Bureau of Economic Research, Inc.
  8. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9706, Faculty of Economics, University of Cambridge.
  9. M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2007. "What if the UK or Sweden had joined the euro in 1999? An empirical evaluation using a Global VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(1), pages 55-87.
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  12. Pesaran, M. Hashem & Schuermann, Til & Smith, L. Vanessa, 2009. "Rejoinder to comments on forecasting economic and financial variables with global VARs," International Journal of Forecasting, Elsevier, Elsevier, vol. 25(4), pages 703-715, October.
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Cited by:
  1. Mthuli Ncube & Zuzana Brixiova & Qingwei Meng, 2014. "Can Intra-Regional Trade Act as a Global Shock Absorber in Africa?," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan wp1073, William Davidson Institute at the University of Michigan.
  2. Mthuli Ncube & Zuzana Brixiova & Meng Qingwei, 2014. "Working Paper 198 - Can Intra-Regional Trade Act as a Global Shock Absorber in Africa?," Working Paper Series, African Development Bank 2104, African Development Bank.
  3. Annari de Waal & Renee van Eyden & Rangan Gupta, 2013. "Do we need a global VAR model to forecast inflation and output in South Africa?," Working Papers, University of Pretoria, Department of Economics 201346, University of Pretoria, Department of Economics.

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