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Identifying aggregate supply and demand shocks in South Africa

Listed author(s):
  • Stan du Plessis

    ()

    (Department of Economics, Stellenbosch University)

  • Ben Smit

    ()

    (Bureau of Economic Research, Stellenbosch University)

  • Federico Sturzenegger

    (Kennedy School of Government, Harvard University)

This paper uses a structural VAR methodology to identify aggregate demand and supply shocks to real output for the South African economy. Demand shocks, in turn, are separated into fiscal and monetary shocks. The model is estimated with quarterly data over two overlapping samples: 1960Q2-2006Q4 and 1983Q4-2006Q4. The identified (structural) shocks were used in a historical decomposition to split output into a measure of potential output (resulting from the evolution of supply shocks) and a measure of the business cycle (the gap between actual and potential output). This measure of potential output suggests a significant decline relative to trend in the years prior to the political transition of 1994 and a swift reversal thereafter. The paper presents evidence from three sources to support its identification of aggregate supply and demand shocks. These sources are the following: theory consistent impulse response functions; a close match between the implied measure of the business cycle and independent information about the South African business cycle; and a demonstration of the close match between the identified series of aggregate supply shocks and important historical events in the decades prior to and following 1994 that have been identified by economic historians as important shocks to the South African economy.

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File URL: https://www.ekon.sun.ac.za/wpapers/2007/wp112007/wp-11-2007.pdf
File Function: First version, 2007
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Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 11/2007.

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Date of creation: 2007
Handle: RePEc:sza:wpaper:wpapers42
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  1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
  2. P. Burger & M. Marinkov, 2006. "The South African Phillips Curve: How Applicable Is The Gordon Model?," South African Journal of Economics, Economic Society of South Africa, vol. 74(2), pages 172-189, 06.
  3. J.W. Fedderke & E. Schaling, 2005. "Modelling Inflation In South Africa: A Multivariate Cointegration Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 73(1), pages 79-92, 03.
  4. Charlotte DU Toit & Elna Moolman, 2003. "Estimating Potential Output And Capacity Utilisation For The South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 71(1), pages 96-118, 03.
  5. Jeffrey Frankel & Ben Smit & Federico Sturzenegger, 2008. "South Africa: Macroeconomic challenges after a decade of success," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(4), pages 639-677, October.
  6. Geoffrey Woglom, 2005. "Forecasting South African Inflation," South African Journal of Economics, Economic Society of South Africa, vol. 73(2), pages 302-320, 06.
  7. Antonio Fatás & Ilian Mihov, 2003. "The Case for Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1419-1447.
  8. Ben Smit & Le Roux Burrows, 2002. "Estimating potential output and output gaps for the South African economy," Working Papers 05/2002, Stellenbosch University, Department of Economics.
  9. du Plessis, S.A., 2006. "Reconsidering the business cycle and stabilisation policies in South Africa," Economic Modelling, Elsevier, vol. 23(5), pages 761-774, September.
  10. J. Geldenhuys & M. Marinkov, 2007. "Robust Estimates of Okun's Coefficient for South Africa," Working Papers 55, Economic Research Southern Africa.
  11. Dupasquier, Chantal & Guay, Alain & St-Amant, Pierre, 1999. "A Survey of Alternative Methodologies for Estimating Potential Output and the Output Gap," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 577-595, July.
  12. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-840, September.
  13. C. B. Du Toit & Renee´ Van Eyden & Marc Ground, 2006. "Does South Africa Have the Potential and Capacity to Grow at 7 Per Cent?: A Labour Market Perspective," Working Papers 200603, University of Pretoria, Department of Economics.
  14. Tobias Knedlik, 2006. "Estimating Monetary Policy Rules For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 74(4), pages 629-641, December.
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