Identifying supply and demand shocks in the South African Economy, 1960–2020

This paper addresses the identification of supply and demand shocks in the South African economy over the 1960–2020 period, the relative importance of the two types of shock to fluctuations of growth and inflation from their steady‐state values, as well as the potential impact of the two types of shocks on the steady‐state growth and inflation values. Crucially, the paper examines the significance of three alternative identification strategies on the nature of supply and demand shocks and their impact on the economy: zero shock covariance in the presence of long‐run demand neutrality; non‐zero shock covariance in the presence of long‐run demand neutrality and long‐run demand non‐neutrality with zero shock covariance. Interest lies in which of the identification strategies provides shock decompositions that are theoretically coherent and congruent with the empirics of South African growth and inflation. Results support non‐zero shock covariance in the presence of long‐run demand neutrality identification. The analysis suggests that growth shocks in South Africa are dominated by supply shocks, and inflation shocks by demand shocks. Further, negative supply shocks lower steady state growth and raise steady‐state inflation, while positive demand shocks only raise steady‐state inflation and are growth neutral. South Africa appears relatively isolated from international productivity shocks.