'Quantitative Easing' and central bank asset purchases in South Africa: A DSGE approach

This paper develops a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model to evaluate the effect of the temporary emergency purchases of government bonds by the South African Reserve Bank (SARB) during 2020. The model is constructed in the portfolio balancing framework, in which the non-bank private sector holds a portfolio of imperfectly substitutable domestic government bonds of different maturities. This allows bond purchases by the central bank, through changing the composition of household bond portfolios, to influence the macroeconomy. The model is calibrated and simulated on South African data. Consistent with similar models of Quantitative Easing simulated for the US and the UK, the results here illustrate that bond purchases by the SARB could have a broader stimulatory macroeconomic impact, over and above the SARB’s primary objective of providing liquidity to domestic financial markets. This includes an expansion in the money supply, a fall in long-term government bond yields, and an increase in consumption, inflation and output. However, given the relatively small scale of the SARB’s bond purchases, the stimulus effect is modest.