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The South African Economic Response to Monetary Policy Uncertainty

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey and Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Charl Jooste

    (Department of Economics, University of Pretoria)

Abstract

We study the evolution of monetary policy uncertainty and its impact on the South African economy. We show that volatility is high and constant using a stochastic volatility model in a sign-restricted VAR setup. Stochastic volatility is model driven and there is an endogenous economic response to uncertainty. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. We study the transmission mechanism of uncertainty for South Africa using a nonlinear DSGE model. The model is calibrated based on the existing literature while the persistence and size of uncertainty is taken from the empirical VAR. The DSGE model shows that the size of the uncertainty shock matters - high uncertainty can lead to a severe contraction in output, inflation and interest rates.

Suggested Citation

  • Mehmet Balcilar & Rangan Gupta & Charl Jooste, 2015. "The South African Economic Response to Monetary Policy Uncertainty," Working Papers 201551, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201551
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    Cited by:

    1. Chevaughn van der Westhuizen & Renee van Eyden & Goodness C. Aye, 2022. "Is Inflation Uncertainty a Self-Fulfilling Prophecy? The Inflation-Inflation Uncertainty Nexus and Inflation Targeting in South Africa," Working Papers 202254, University of Pretoria, Department of Economics.
    2. Goodness C. Aye, 2019. "Fiscal Policy Uncertainty and Economic Activity in South Africa: An Asymmetric Analysis," Working Papers 201922, University of Pretoria, Department of Economics.
    3. Reneé van Eyden & Rangan Gupta & Christophe André & Xin Sheng, 2022. "The effect of macroeconomic uncertainty on housing returns and volatility: evidence from US state-level data," Chapters, in: Charles K.Y. Leung (ed.), Handbook of Real Estate and Macroeconomics, chapter 8, pages 206-238, Edward Elgar Publishing.
    4. Aye, Goodness C., 2021. "Short and Long Run Asymmetric Effects of Monetary and Fiscal Policy Uncertainty on Economic Activity in the U.S," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 74(1), pages 83-96.
    5. Goodness C. Aye, 2019. "Short and Long Run Asymmetric Effects of Monetary and Fiscal Policy Uncertainty on Economic Activity in the U.S," Working Papers 201923, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Uncertainty; nonlinear DSGE; stochastic volatility;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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