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Identifying aggregate supply and demand shocks in South Africa

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Author Info

  • Stan du Plessis

    ()
    (Department of Economics, Stellenbosch University)

  • Ben Smit

    ()
    (Bureau of Economic Research, Stellenbosch University)

  • Federico Sturzenegger

    (Kennedy School of Government, Harvard University)

Abstract

This paper uses a structural VAR methodology to identify aggregate demand and supply shocks to real output for the South African economy. Demand shocks, in turn, are separated into fiscal and monetary shocks. The model is estimated with quarterly data over two overlapping samples: 1960Q2-2006Q4 and 1983Q4-2006Q4. The identified (structural) shocks were used in a historical decomposition to split output into a measure of potential output (resulting from the evolution of supply shocks) and a measure of the business cycle (the gap between actual and potential output). This measure of potential output suggests a significant decline relative to trend in the years prior to the political transition of 1994 and a swift reversal thereafter. The paper presents evidence from three sources to support its identification of aggregate supply and demand shocks. These sources are the following: theory consistent impulse response functions; a close match between the implied measure of the business cycle and independent information about the South African business cycle; and a demonstration of the close match between the identified series of aggregate supply shocks and important historical events in the decades prior to and following 1994 that have been identified by economic historians as important shocks to the South African economy.

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File URL: http://www.ekon.sun.ac.za/wpapers/2007/wp112007/wp-11-2007.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 11/2007.

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Date of creation: 2007
Date of revision:
Handle: RePEc:sza:wpaper:wpapers42

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Related research

Keywords: South Africa; aggregate supply; aggregate demand; monetary policy; fiscal policy; potential output; long-run restrictions;

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Cited by:
  1. Amusa, Kafayat & Gupta, Rangan & Karolia, Shaakira & Simo-Kengne, Beatrice D., 2013. "The long-run impact of inflation in South Africa," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 798-812.
  2. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel Abidin Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working papers 2012-27, University of Connecticut, Department of Economics.
  3. Stan du Plessis & Gideon du Rand, 2011. "On the (non-)equivalence of capital adequacy and monetary policy: A response to Cechetti and Kohler," Working Papers 04/2011, Stellenbosch University, Department of Economics.
  4. Stan Du Plessis & Kevin Kotze, 2012. "Trends and Structural Changes in South African Macroeconomic Volatility," Working Papers 297, Economic Research Southern Africa.

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