Monetary Policy Effectiveness in the Face of Uncertainty: The Real Macroeconomic Impact of a Monetary Policy Shock in South Africa during High and Low Uncertainty States

Economies all over the world operate monetary policy with the main objective to create stable macroeconomic environment for economic prosperity, with monetary policy typically the first line of defence against a number of internal and external shocks. This study addresses whether the effectiveness of monetary policy in South Africa is influenced by the prevailing degree of uncertainty in the domestic goods, stock and currency market as well as the degree of uncertainty in global markets. This is investigated through a Self-Exciting Interacted VAR (SEIVAR) methodology augmented with GARCH and EGARCH volatilities on monthly South African data, over the period 2000:02-2022:05 during which South Africa operated under an inflation targeting regime. Results point to the asymmetric effects of a monetary policy shock dependent on the uncertainty state and that monetary policy was less effective in the high uncertainty states. The results hold important policy implications for the policy makers, as it is imperative to understand how uncertainty alters the transmission of monetary policy through the economy.