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Working Paper 161 - The Impact of Euro Area Monetary and Bond Yield Shocks on the South African Economy: Structural Vector Autoregression Model Evidence

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  • Mthuli Ncube

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  • Eliphas Ndou
  • Nombulelo Gumata

Abstract

Structural vector autoregression (SVAR) models were used in this study to investigate how unexpected increases in euro area bond yields and monetary stimulus are transmitted to the South African economy using data from January 1999 to June 2008. Firstly, evidence is found that this is consistent with the predictions of the capital flow effects on asset prices, which include depressed bond yields, evaluation of stock prices and exchange rate appreciation due to euro area monetary stimulus. Secondly, the perverse effects of a large economy’s monetary stimulus into a small open economy predicted by the Mundell–Fleming model was assessed. A significant drop was found in the growth of broad money supply, interest rates declined and the trade balance deteriorated. Thirdly, the study finds that a positive shock to euro area bond yields leads to an increase in nominal bond yields and a significant, but delayed, depreciation in the exchange rate of the rand. The results of a model that extended the sample to May 2011 to include the current period of economic instability and applying counterfactual analysis thereafter suggest that the exchange rate was overvalued between 2010 and 2011.

Suggested Citation

  • Mthuli Ncube & Eliphas Ndou & Nombulelo Gumata, 2012. "Working Paper 161 - The Impact of Euro Area Monetary and Bond Yield Shocks on the South African Economy: Structural Vector Autoregression Model Evidence," Working Paper Series 439, African Development Bank.
  • Handle: RePEc:adb:adbwps:439
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    File URL: https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working%20Paper%20161%20-%20The%20Impact%20of%20Euro%20Area%20Monetary%20and%20Bond%20Yield%20Shocks%20on%20the%20South%20African%20Economy%20Structural%20Vector%20Autoregression%20Model%20Evidence.pdf
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    Cited by:

    1. Zuzana Brixiova & Qingwei Meng & Mthuli Ncube, 2015. "Can Intra-Regional Trade Act as a Global Shock Absorber in Africa?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 16(3), pages 141-162, July.

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