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Public debt and inflation dynamics in South Africa: An estimated NK-DSGE model with a monetary and fiscal policy mix regime

Author

Listed:
  • Guangling Liu

  • Marrium Mustapher

Abstract

This study estimates a closed economy NK-DSGE model with a monetary and fiscal policy mix regime to examine the role of a coexistence regime in shaping the effects of policy shocks on the dynamics of public debt, inflation, and other key variables in South Africa. The results show that when the monetary and fiscal authorities coordinate to stabilize public debt, as in the coexistence regime, the macroeconomic effects of fiscal and monetary policy shocks are relatively balanced. The coexistence regime emerges as a more desirable policy mix, offering a solution to stable economic growth while effectively managing both public debt and inflation, compared to Regime M (an active monetary policy and a passive fiscal policy) and Regime F (an active fiscal policy and a passive monetary policy). While supply and demand shocks remain important drivers of fluctuations in public debt and inflation, the contribution of policy shocks is also non-negligible. Both the debt service cost channel and the initial fiscal condition play a significant role in shaping the dynamics of public debt and inflation.

Suggested Citation

  • Guangling Liu & Marrium Mustapher, 2026. "Public debt and inflation dynamics in South Africa: An estimated NK-DSGE model with a monetary and fiscal policy mix regime," ERSA Working Paper Series 283, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:283
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    File URL: https://ersawps.org/index.php/working-paper-series/article/view/283/209
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • 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
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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