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Monetary-fiscal coordination in South Africa: Aligning the stars

Author

Listed:
  • Hylton Hollander

    (University of Cape Town)

  • Roy Havemann

    (Stellenbosch University)

Abstract

Monetary-fiscal policy tensions build-up when debt is rising and inflation is falling. The consequence is that either fiscal policy must achieve fiscal consolidation with monetary policy maintaining price stability (passive FP-active MP) or monetary policy must accommodate fiscal policy in debt stabilisation leaving fiscal policy free to achieve its spending and redistribution objectives (passive MP-active FP). We introduce the concept of a fiscal neutral rate (fiscal r-star) into a two-agent new Keynesian dynamic stochastic general equilibrium model estimated with South African data. We show two persistent gaps: (i) monetary r-star exceeds fiscal r-star, indicating a misalignment between monetary and fiscal policy; and (ii) market interest rates exceed fiscal r-star, implying that, without policy action, the risk premium on borrowing will continue to be a drag on growth and debt service costs are likely to crowd out other spending. Our model simulations show that the optimal welfare outcomes are achieved by taking steps to align fiscal r-star with monetary r-star, through introducing a credible fiscal anchor.

Suggested Citation

  • Hylton Hollander & Roy Havemann, 2026. "Monetary-fiscal coordination in South Africa: Aligning the stars," ERSA Working Paper Series 264, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:264
    as

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    References listed on IDEAS

    as
    1. Lauren Kuhn & Franz Ruch & Rudi Steinbach, 2019. "Reaching for the rstars estimating South Africas neutral real interest rate," Working Papers 9097, South African Reserve Bank.
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    6. Guangling Liu & Fernando Garcia-Barragan, "undated". "Government expenditure shocks and inflation: A new fiscal policy rule with monetaryand fiscal interactions," ERSA Working Paper Series v::y:2025:i::id:133, Economic Research Southern Africa.
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    Keywords

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    JEL classification:

    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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