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Synchronization between South Africa and the U.S.: A Structural Dynamic Factor Analysis

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  • Alain Kabundi

Abstract

This paper studies the synchronization of economic variables between South Africa and the US. In addition it examines transmission channels through which supply and demand shocks from the US effect economic activity in South Africa. We use a structural dynamic factor model approach, instead of the well known structural vector autoregressive method, as it accommodates a large panel of time series variables. The paper contains four findings. First, using the full-sample period, US supply shocks are transmitted to South Africa through business confidence and imports of goods and services; while US demand shocks are transmitted via interest rates, stock prices, exports of goods and services, and real effective exchange rates. Second, there is a decrease in integration over time as the common component of GDP drops in the reduced sample. The impact of an increase in comovement of GDP is outweighed by several factors resulting from the structural reforms initiated by the government after the end of apartheid. Thirdly, in the latter period the South African economy is mainly affected by the US supply shocks through a variety of channels. For this latter period, US supply shocks are forcefully transmitted to South Africa via consumer and business confidence, stock prices and real effective exchange rates. Finally, the idiosyncratic component still plays an important role in the South African economy. Structural reforms are crucial to make the domestic economy competitive internationally.

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  • Alain Kabundi, 2007. "Synchronization between South Africa and the U.S.: A Structural Dynamic Factor Analysis," Working Papers 50, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:50
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    Cited by:

    1. repec:bla:sajeco:v:85:y:2017:i:3:p:430-454 is not listed on IDEAS
    2. Mustafa Çakir & Alain Kabundi, 2014. "Working Paper – WP/14/05- Transmission of China’s Shocks to the BRIS Countries," Papers 6345, South African Reserve Bank.
    3. Alain Kabundi & Elsabé Loots, 2010. "Patterns Of Co‐Movement Between South Africa And Germany: Evidence From The Period 1985 To 2006," South African Journal of Economics, Economic Society of South Africa, vol. 78(4), pages 383-399, December.
    4. Alain Kabundi & Elsabé Loots, 2009. "Patterns of co-movement between a developed and emerging market economy: The case of South Africa and Germany," Working Papers 159, Economic Research Southern Africa.
    5. Mustafa Çakir & Alain Kabundi, 2017. "Transmission of China's Shocks to the BRIS Countries," South African Journal of Economics, Economic Society of South Africa, vol. 85(3), pages 430-454, September.

    More about this item

    Keywords

    Dynamic factor models; international business cycles; sign restrictions;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F00 - International Economics - - General - - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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