Synchronization between South Africa and the U.S.: A Structural Dynamic Factor Analysis
AbstractThis paper studies the synchronization of economic variables between South Africa and the US. In addition it examines transmission channels through which supply and demand shocks from the US effect economic activity in South Africa. We use a structural dynamic factor model approach, instead of the well known structural vector autoregressive method, as it accommodates a large panel of time series variables. The paper contains four findings. First, using the full-sample period, US supply shocks are transmitted to South Africa through business confidence and imports of goods and services; while US demand shocks are transmitted via interest rates, stock prices, exports of goods and services, and real effective exchange rates. Second, there is a decrease in integration over time as the common component of GDP drops in the reduced sample. The impact of an increase in comovement of GDP is outweighed by several factors resulting from the structural reforms initiated by the government after the end of apartheid. Thirdly, in the latter period the South African economy is mainly affected by the US supply shocks through a variety of channels. For this latter period, US supply shocks are forcefully transmitted to South Africa via consumer and business confidence, stock prices and real effective exchange rates. Finally, the idiosyncratic component still plays an important role in the South African economy. Structural reforms are crucial to make the domestic economy competitive internationally.
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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 50.
Length: 39 pages
Date of creation: Jul 2007
Date of revision:
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Dynamic factor models; international business cycles; sign restrictions;
Other versions of this item:
- Alain Kabundi, 2009. "Synchronisation Between South Africa And The U.S.: A Structural Dynamic Factor Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 77(1), pages 1-27, 03.
- C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F00 - International Economics - - General - - - General
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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