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Real Interest Rate Persistence in South Africa: Evidence and Implications

  • Sonali Das

    ()

    (CSIR, Pretoria, South Africa)

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Patrick T. Kanda

    ()

    (Department of Economics, University of Pretoria)

  • Monique Reid

    ()

    (Department of Economics, Stellenbosch University)

  • Christian K. Tipoy

    ()

    (Department of Economics, University of Pretoria)

  • Mulatu F. Zerihun

    (Department of Economics, University of Pretoria)

The real interest rate is a very important variable in the transmission of monetary policy. It features in vast majority of financial and macroeconomic models. Though the theoretical importance of the real interest rate has generated a sizable literature that examines its long-run properties, surprisingly, there does not exist any study that delves into this issue for South Africa. Given this, using quarterly data (1960:Q2-2010:Q4) for South Africa, our paper endeavors to analyze the long-run properties of the EPRR by using tests of unit root, cointegration, fractional integration and structural breaks. In addition, we also analyze whether monetary shocks contribute to fluctuations in the real interest rate based on test of structural breaks of the rate of inflation, as well as, Bayesian change point analysis. Based on the tests conducted, we conclude that the South African EPPR can be best viewed as a very persistent but ultimately mean-reverting process. Also, the persistence in the real interest rate can be tentatively considered as a monetary phenomenon.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201204.

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Length: 16 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:pre:wpaper:201204
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