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Identifying Aggregate Supply and Demand Shocks in South Africa †

  • Stan du Plessis
  • Ben Smit
  • Federico Sturzenegger

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. Copyright 2008 The author 2008. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jae/ejn005
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Article provided by Centre for the Study of African Economies (CSAE) in its journal Journal of African Economies.

Volume (Year): 17 (2008)
Issue (Month): 5 (November)
Pages: 765-793

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Handle: RePEc:oup:jafrec:v:17:y:2008:i:5:p:765-793
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  1. Stan du Plessis, 2005. "Reconsidering the business cycle and stabilisation policies in South Africa," Working Papers 10, Economic Research Southern Africa.
  2. Jeffrey Frankel & Ben Smit & Federico Sturzenegger, 2008. "South Africa: Macroeconomic challenges after a decade of success," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(4), pages 639-677, October.
  3. Ben Smit & Le Roux Burrows, 2002. "Estimating potential output and output gaps for the South African economy," Working Papers 05/2002, Stellenbosch University, Department of Economics.
  4. J. Geldenhuys & M. Marinkov, 2007. "Robust Estimates of Okun's Coefficient for South Africa," Working Papers 55, Economic Research Southern Africa.
  5. Dupasquier, Chantal & Guay, Alain & St-Amant, Pierre, 1999. "A Survey of Alternative Methodologies for Estimating Potential Output and the Output Gap," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 577-595, July.
  6. J.W. Fedderke & E. Schaling, 2005. "Modelling Inflation In South Africa: A Multivariate Cointegration Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 73(1), pages 79-92, 03.
  7. Tobias Knedlik, 2006. "Estimating Monetary Policy Rules For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 74(4), pages 629-641, December.
  8. P. Burger & M. Marinkov, 2006. "The South African Phillips Curve: How Applicable Is The Gordon Model?," South African Journal of Economics, Economic Society of South Africa, vol. 74(2), pages 172-189, 06.
  9. Chantal Dupasquier & Alain Guay & Pierre St-Amant, 1997. "A Comparison of Alternative Methodologies for Estimating Potential Output and the Output Gap," Working Papers 97-5, Bank of Canada.
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