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The impact of capital flow reversal shocks in South Africa: a stock- and-flow-consistent analysis

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  • Konstantin Makrelov
  • Rob Davies
  • Laurence Harris

Abstract

South Africa has a very well-developed financial sector and high reliance on capital flows. The country saw large capital outflows as the Covid-19 crisis developed, accompanied by a large depreciation of the rand and spikes in bold yields. We employ a stock- and flow-consistent model to study the impact of capital flow reversal shocks on the South African economy. The model includes a richer representation of institutional balance sheets than existing models. The financial sectors behaviour in the model draws on the theoretical frameworks, which highlight the relationship between bank capital, the risk-taking behaviour of the financial sector, lending spreads and economic activity. We specify a dynamic adjustment model of household expectations with properties that differ from the way in which expectations are formed in either stock- and flow-consistent or (DSGE) models. Household expectations resemble bounded rationality. The financial accelerator mechanism operates through the balance sheets of all institutions in the economy. We find that a reversal in capital flows can affect the domestic economy through its impact on domestic liquidity, on the risk-taking behaviour of the financial sector, and on the demand for assets.

Suggested Citation

  • Konstantin Makrelov & Rob Davies & Laurence Harris, 2021. "The impact of capital flow reversal shocks in South Africa: a stock- and-flow-consistent analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 35(3-4), pages 475-501, July.
    • Handle: RePEc:taf:irapec:v:35:y:2021:i:3-4:p:475-501
    DOI: 10.1080/02692171.2021.1888897
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    Cited by:

    1. Anh Tram Luong & Khoi Thai Tran & Linh Thuy Duong & Dung Ngoc Ha & Trang Thuy Duong & Vy Thi Khanh Phan, 2025. "Spillover of Shocks in Money Flows Across Stock Markets: A Quantile‐Time Frequency Analysis of G7 and BRICS Countries," Economic Papers, The Economic Society of Australia, vol. 44(4), pages 369-390, December.
    2. Johnson Worlanyo Ahiadorme, 2022. "On the aggregate effects of global uncertainty: Evidence from an emerging economy," South African Journal of Economics, Economic Society of South Africa, vol. 90(3), pages 390-407, September.
    3. Vafa Anvari & Channing Arndt & Faaiqa Hartley & Konstantin Makrelov & Kenneth Strezepek & Tim Thomas & Sherwin Gabriel & Bruno Merven, 2022. "A climate change modelling framework for financial stress testing in Southern Africa," Working Papers 11030, South African Reserve Bank.
    4. Frederik J.C. Beyers & Allan De Freitas & Kojo A. Essel‐Mensah & Reyno Seymore & Dimitrios P. Tsomocos, 2022. "A computable general equilibrium model as a banking sector regulatory tool in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 90(1), pages 93-120, March.
    5. Shaun de Jager & Chris Loewald & Konstantin Makrelov & Xolani Sibande, 2022. "Leaningagainstthewindwithfiscalandmonetarypolicy," Working Papers 11033, South African Reserve Bank.
    6. Brent Cloete, "undated". "Climate Vulnerability of Southern Africa," ERSA Working Paper Series 03, Economic Research Southern Africa.
    7. Chen, Fengxian & Feng, Wenhua & Dong, Jingyi & Wang, Yuan, 2025. "The sudden stops of international capital flows and corporate financing constraints——An empirical analysis based on global listed companies," Journal of International Money and Finance, Elsevier, vol. 158(C).

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