Journal of Economics and Financial Analysis, 7 (1), pp. 13-42, [2023]
URI: https://ojs.tripaledu.com/jefa/article/view/80/91

Examining the Dynamic Nexus of Monetary and Fiscal Policy in South Africa: Evidence from Key Macroeconomic Economic Indicators


University of Free State, South Africa


DOI: http://dx.doi.org/10.1991/jefa.v7i1.a57

Abstract

This paper examines the dynamic nexus of monetary and fiscal policy in South Africa with evidence from key macroeconomic economic indicators from 2000 quarter 1 to 2022 quarter 3. The Markov-switching dynamic regression is used in the Taylor theoretical framework. The contemplation is what type of monetary and fiscal policy mix in a different state of policy rate or repo rate. There is less attention to the analysis of the impact of fiscal policy macroeconomic variables in a different state of policy rate with the consideration of the lower bound and upper bound rate of inflation. The South Africa Reserve Bank's reaction to fiscal policy macroeconomic variables is significant in different states. Moreover, there is evidence of constant reaction of the South Africa Reserve Bank when inflation is at the lower and upper bound. The increase in the gross domestic product gap and inflation gap results in an increase in the rope rate. The result suggests that the monetary policy provided a supportive policy to fiscal policy macroeconomic variables. However, there is a state that reflects trade-offs in the current monetary and fiscal policy mix reaction. The fiscal policy needs to be adjusted to attain the desired target.

Keywords

Fiscal Policy; Monetary Policy; Markov-Switching Dynamic Regression (MSDR).

JEL Classification

E43, E51, E3.

Full Text:

PDF

References

Afonso, A., Alves, J., & Balhote, R. (2019) Interactions between monetary and fiscal policies. Journal of Applied Economics, 22(1), 132-151, DOI: 10.1080/15140326.2019.1583309

Agu, C. (2011). An econometric analysis of the monetary policy reaction function in Nigeria, AERC.

Ahmad, S. (2016). A multiple threshold analysis of the Fed's balancing act during the Great Moderation. Economic Modeling, 55, 343-358.

Al-shawarby, S., and El Mossallamy, M. (2019). Monetary-fiscal policies interactions and optimal rules in Egypt. Review of Economics and Political Science, 4(2), 138-157.

Alesina, A., Favero, C., and Giavazzi, F. (2019). Effects of Austerity: Expenditure- and Tax-Based Approaches. Journal of Economic Perspectives, 33(2), 141-62. DOI: 10.1257/jep.33.2.141

Ayinde, T.O., Bankole, A.S., and Adeniyi, O. (2020). Modelling central bank behaviour in Nigeria:A Markov-switching approach. Central Bank Review, 20(4), 213-221. https://doi.org/10.1016/j.cbrev.2020.11.001.

Battistini, N., and Callegari, G., and Zavalloni, L. (2019). Dynamic Fiscal Limits and Monetary-Fiscal Policy Interactions. ECB Working Paper No. 2268. http://dx.doi.org/10.2139/ssrn.3374165

Bianchi, F., and Ilut, C. (2017). Monetary/fiscal policy mix and agents' beliefs. Review of economic Dynamics, 26, 113-139.

Buthelezi, E.M., and Nyatanga, P. (2018). Government Debt and Economic Growth: Evidence from ECOWAS and SADC. African Journal of Business & Economic Research, 13(3).

Cavalcanti, M.A.F.H., Vereda, L., Doctors, R.B., Lima, F.C., & Maynard, L. (2018). The macroeconomic effects of monetary policy shocks under fiscal rules constrained by public debt sustainability. Economic Modelling, 71, 184-201. https://doi.org/10.1016/j.econmod.2017.12.010.

Çebi, C. (2012). The interaction between monetary and fiscal policies in Turkey: An estimated New Keynesian DSGE model. Economic Modeling, 29(4), 1258-1267.

Christiano, L., and Fitzgerald, T. (2003). The Bandpass Filter. International Economic Review, 44(2), 435-465.

Cordes, A.C. (2020). Fiscal Consolidation Following a Sovereign Default. Hertie School of Governance.

Crowley, P.M., and Hudgins, D. (2018). Evaluating South African fiscal and monetary policy trade‐offs using a wavelet‐based model. South African Journal of Economics, 86(4), 401-427.

Cui, W. (2016). Monetary–fiscal interactions with endogenous liquidity frictions. European Economic Review, 87, 1-25.

Davig, T. and Leeper, E.M. (2011). Monetary–fiscal policy interactions and fiscal stimulus. European Economic Review, 55(2), 211-227.

Dosi, G., Fagiolo, G., Napoletano, M. Roventini, A., & Treibich, T. (2015). Fiscal and monetary policies in complex evolving economies. Journal of Economic Dynamics and Control, 52(C), 166-189

Du Plessis, S., Smit, B., & Sturzenegger, F. (2007). The Cyclicality Of Monetary And Fiscal Policy In South Africa Since 1994. South African Journal of Economics, Economic Society of South Africa, 75(3), 391-411. DOI: 10.1111/j.1813-6982.2007.00128.x

Hamilton, J.D. (1989). A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica: Journal of the econometric society, 357-384.

Hamilton, J.D. (1990). Analysis of time series subject to changes in regime. Journal of econometrics, 45(1-2), 39-70.

Hansen, B.E. (1996). Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica: Journal of the econometric society, 413-430.

Hansen, B.E. (2000). Sample splitting and threshold estimation. Econometrica, 68(3), 575-603.

Hodrick, R.J., & Prescott, E.C. (1987). Postwar U.S. Business Cycles: An Empirical Investigation. Journal of Money, Credit and Banking, 29(1), 1-16

Iddrisu, A.A., and Alagidede, I.P. (2021). Is the monetary policy behavior of the South African Reserve Bank nonlinear? Global Business and Economics Review, 24(2), 193-209.

Karamysheva, M. (2022). How do fiscal adjustments work? An empirical investigation. Journal of Economic Dynamics and Control, 137(C). DOI: 10.1016/j.jedc.2022.104347

Liu, D., Sun, W., & Chang, L. (2021). Monetary–fiscal policy regime and macroeconomic dynamics in China. Economic Modelling, 95(C), 121-135. DOI: 10.1016/j.econmod.2020.12.007

Lubik, T.A., and Schorfheide, F. (2007). Do central banks respond to exchange rate movements? A structural investigation. Journal of Monetary economics, 54(4), 1069-1087.

Mankiw, N.G. (2019). Brief Principles of Macroeconomics. Boston: Cengage Learning.

Omotosho, B.S. (2022). Monetary and fiscal policy interactions in resource-rich emerging economies. Macroeconomics and Finance in Emerging Market Economies, 1-22.

Rezabek, P., and Doucek, P. (2018). Monetary and fiscal policy interactions in the Czech Republic. Systems, 6(2), 25.

Tavakolian, H., and Taherpoor, J. (2022). Fiscal and Monetary Policy Interaction in Iran: A TVP-VARMA Model. Iranian Economic Review, 26(3), 637-665.

Taylor, J.B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester conference series on public policy, 39, 195-214, https://doi.org/10.1016/0167-2231(93)90009-L.

Taylor, J.B. (1998). Monetary policy and the long boom. Federal Reserve Bank of St. Louis Review, 3-12.

Taylor, J.B. (1999). The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European Central Bank. Journal of Monetary economics, 43(3), 655-679.

Taylor, J.B. (2001). The role of the exchange rate in monetary-policy rules. American Economic Review, 91(2), 263-267.

Utama, C., and Fitrady, A. (2022). Fiscal and Monetary Policy Interactions in Indonesia during Periods of Economic Turmoil in the US: 2001Q1-2014Q4. Bulletin of Monetary Economics and Banking, 25(1), 97-116.

Valli, M., and Carvalho, F.A. (2010). Fiscal and monetary policy interaction: a simulation-based analysis of a two-country new Keynesian DSGE Model with Heterogeneous Households. Bank of Italy Occasional Paper.

Wang, L. (2018). Monetary-fiscal policy interactions under asset purchase programs: Some comparative evidence. Economic Modeling, 73, 208-221.

Xu, L., and Serletis, A. (2016). Monetary and fiscal policy switching with time-varying volatilities. Economics Letters, 145, 202-205.

Yang, W., Fidrmuc, J., & Ghosh, S. (2015). Macroeconomic effects of fiscal adjustment: A tale of two approaches. Journal of International Money and Finance, 57, 31-60, https://doi.org/10.1016/j.jimonfin.2015.05.003.




Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.