Exchange rate pass-through to domestic prices in Kenya
- Authors: Mnjama, Gladys Susan
- Date: 2011
- Subjects: Kenya -- Economic conditions , Kenya -- Economic conditions -- Econometric models , Foreign exchange rates -- Kenya , Stocks -- Prices -- Kenya , Banks and banking -- Kenya , Cointegration , Econometrics , Inflation (Finance) -- Kenya
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:975 , http://hdl.handle.net/10962/d1002709 , Kenya -- Economic conditions , Kenya -- Economic conditions -- Econometric models , Foreign exchange rates -- Kenya , Stocks -- Prices -- Kenya , Banks and banking -- Kenya , Cointegration , Econometrics , Inflation (Finance) -- Kenya
- Description: In 1993, Kenya liberalised its trade policy and allowed the Kenyan Shillings to freely float. This openness has left Kenya's domestic prices vulnerable to the effects of exchange rate fluctuations. One of the objectives of the Central Bank of Kenya is to maintain inflation levels at sustainable levels. Thus it has become necessary to determine the influence that exchange rate changes have on domestic prices given that one of the major determinants of inflation is exchange rate movements. For this reason, this thesis examines the magnitude and speed of exchange rate pass-through (ERPT) to domestic prices in Kenya. In addition, it takes into account the direction and size of changes in the exchange rates to determine whether the exchange rate fluctuations are symmetric or asymmetric. The thesis uses quarterly data ranging from 1993:Ql - 2008:Q4 as it takes into account the period when the process of liberalization occurred. The empirical estimation was done in two stages. The first stage was estimated using the Johansen (1991) and (1995) co integration techniques and a vector error correction model (VECM). The second stage entailed estimating the impulse response and variance decomposition functions as well as conducting block exogeneity Wald tests. In determining the asymmetric aspect of the analysis, the study followed Pollard and Coughlin (2004) and Webber (2000) frameworks in analysing asymmetry with respect to appreciation and depreciation and large and small changes in the exchange rate to import prices. The results obtained showed that ERPT to Kenya is incomplete but relatively low at about 36 percent in the long run. In terms of asymmetry, the results showed that ERPT is found to be higher in periods of appreciation than depreciation. This is in support of market share and binding quantity constraints theory. In relation to size changes, the results show that size changes have no significant impact on ERPT in Kenya.
- Full Text:
- Authors: Mnjama, Gladys Susan
- Date: 2011
- Subjects: Kenya -- Economic conditions , Kenya -- Economic conditions -- Econometric models , Foreign exchange rates -- Kenya , Stocks -- Prices -- Kenya , Banks and banking -- Kenya , Cointegration , Econometrics , Inflation (Finance) -- Kenya
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:975 , http://hdl.handle.net/10962/d1002709 , Kenya -- Economic conditions , Kenya -- Economic conditions -- Econometric models , Foreign exchange rates -- Kenya , Stocks -- Prices -- Kenya , Banks and banking -- Kenya , Cointegration , Econometrics , Inflation (Finance) -- Kenya
- Description: In 1993, Kenya liberalised its trade policy and allowed the Kenyan Shillings to freely float. This openness has left Kenya's domestic prices vulnerable to the effects of exchange rate fluctuations. One of the objectives of the Central Bank of Kenya is to maintain inflation levels at sustainable levels. Thus it has become necessary to determine the influence that exchange rate changes have on domestic prices given that one of the major determinants of inflation is exchange rate movements. For this reason, this thesis examines the magnitude and speed of exchange rate pass-through (ERPT) to domestic prices in Kenya. In addition, it takes into account the direction and size of changes in the exchange rates to determine whether the exchange rate fluctuations are symmetric or asymmetric. The thesis uses quarterly data ranging from 1993:Ql - 2008:Q4 as it takes into account the period when the process of liberalization occurred. The empirical estimation was done in two stages. The first stage was estimated using the Johansen (1991) and (1995) co integration techniques and a vector error correction model (VECM). The second stage entailed estimating the impulse response and variance decomposition functions as well as conducting block exogeneity Wald tests. In determining the asymmetric aspect of the analysis, the study followed Pollard and Coughlin (2004) and Webber (2000) frameworks in analysing asymmetry with respect to appreciation and depreciation and large and small changes in the exchange rate to import prices. The results obtained showed that ERPT to Kenya is incomplete but relatively low at about 36 percent in the long run. In terms of asymmetry, the results showed that ERPT is found to be higher in periods of appreciation than depreciation. This is in support of market share and binding quantity constraints theory. In relation to size changes, the results show that size changes have no significant impact on ERPT in Kenya.
- Full Text:
Exchange rates behaviour in Ghana and Nigeria: is there a misalignment?
- Authors: Mapenda, Rufaro
- Date: 2011 , 2011-11-09
- Subjects: Foreign exchange rates -- Ghana , Foreign exchange rates -- Nigeria , Economic development -- Ghana , Economic development -- Nigeria , Foreign exchange administration -- Ghana , Foreign exchange administration -- Nigeria , International relations
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:976 , http://hdl.handle.net/10962/d1002710 , Foreign exchange rates -- Ghana , Foreign exchange rates -- Nigeria , Economic development -- Ghana , Economic development -- Nigeria , Foreign exchange administration -- Ghana , Foreign exchange administration -- Nigeria , International relations
- Description: Exchange rates are believed to be one of the major driving forces behind sustainable macroeconomic growth and it is therefore important to ensure that they are at an appropriate level. Exchange rate misalignment is a situation where the actual exchange rate differs significantly from its equilibrium value, resulting in either an overvalued or an undervalued currency. The problem with an undervalued currency is that it will increase the domestic price of tradable goods whereas an overvalued currency will cause a fall in the domestic prices of the tradable goods. Persistent exchange rate misalignment is thus expected to result in severe macroeconomic instability. The aim of this study is to estimate the equilibrium real exchange rate for both Ghana and Nigeria. After so doing, the equilibrium real exchange rate is compared to the actual real exchange rate, in order to assess the extent of real exchange rate misalignment in both countries, if any such exists. In order test the applicability of the equilibrium exchange rate models, the study draws from the simple monetary model as well as the Edwards (1989) and Montiel (1999) models. These models postulate that the variables which determine the real exchange rate are the terms of trade, trade restrictions, domestic interest rates, foreign aid inflow, income, money supply, world inflation, government consumption expenditure, world interest rates, capital controls and technological progress. Due to data limitations in Ghana and in Nigeria, not all the variables are utilised in the study. The study uses the Johansen (1995) model as well as the Vector Error Correction Model (VECM) to estimate the long- and the short-run relationships between the above-mentioned determinants and the real exchange rate. Thereafter the study employs the Hodrick-Prescott filter to estimate the permanent equilibrium exchange rate. The study estimates a real exchange rate model each for Ghana and Nigeria. Both the exchange rate models for Ghana and Nigeria provide evidence of exchange rate misalignment. The model for Ghana shows that from the first quarter of 1980 to the last quarter of 1983 the real exchange rate was overvalued; thereafter the exchange rate moved close to its equilibrium value and was generally undervalued with few and short-lived episodes of overvaluation. In regard to real exchange rate misalignment in Nigeria prior to the Structural Adjustment Program in 1986 there were episodes of undervaluation from the first quarter of 1980 to the first quarter of 1984 and overvaluation from the second quarter of 1984 to the third quarter of 1986; thereafter the exchange rate was generally and marginally undervalued.
- Full Text:
- Authors: Mapenda, Rufaro
- Date: 2011 , 2011-11-09
- Subjects: Foreign exchange rates -- Ghana , Foreign exchange rates -- Nigeria , Economic development -- Ghana , Economic development -- Nigeria , Foreign exchange administration -- Ghana , Foreign exchange administration -- Nigeria , International relations
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:976 , http://hdl.handle.net/10962/d1002710 , Foreign exchange rates -- Ghana , Foreign exchange rates -- Nigeria , Economic development -- Ghana , Economic development -- Nigeria , Foreign exchange administration -- Ghana , Foreign exchange administration -- Nigeria , International relations
- Description: Exchange rates are believed to be one of the major driving forces behind sustainable macroeconomic growth and it is therefore important to ensure that they are at an appropriate level. Exchange rate misalignment is a situation where the actual exchange rate differs significantly from its equilibrium value, resulting in either an overvalued or an undervalued currency. The problem with an undervalued currency is that it will increase the domestic price of tradable goods whereas an overvalued currency will cause a fall in the domestic prices of the tradable goods. Persistent exchange rate misalignment is thus expected to result in severe macroeconomic instability. The aim of this study is to estimate the equilibrium real exchange rate for both Ghana and Nigeria. After so doing, the equilibrium real exchange rate is compared to the actual real exchange rate, in order to assess the extent of real exchange rate misalignment in both countries, if any such exists. In order test the applicability of the equilibrium exchange rate models, the study draws from the simple monetary model as well as the Edwards (1989) and Montiel (1999) models. These models postulate that the variables which determine the real exchange rate are the terms of trade, trade restrictions, domestic interest rates, foreign aid inflow, income, money supply, world inflation, government consumption expenditure, world interest rates, capital controls and technological progress. Due to data limitations in Ghana and in Nigeria, not all the variables are utilised in the study. The study uses the Johansen (1995) model as well as the Vector Error Correction Model (VECM) to estimate the long- and the short-run relationships between the above-mentioned determinants and the real exchange rate. Thereafter the study employs the Hodrick-Prescott filter to estimate the permanent equilibrium exchange rate. The study estimates a real exchange rate model each for Ghana and Nigeria. Both the exchange rate models for Ghana and Nigeria provide evidence of exchange rate misalignment. The model for Ghana shows that from the first quarter of 1980 to the last quarter of 1983 the real exchange rate was overvalued; thereafter the exchange rate moved close to its equilibrium value and was generally undervalued with few and short-lived episodes of overvaluation. In regard to real exchange rate misalignment in Nigeria prior to the Structural Adjustment Program in 1986 there were episodes of undervaluation from the first quarter of 1980 to the first quarter of 1984 and overvaluation from the second quarter of 1984 to the third quarter of 1986; thereafter the exchange rate was generally and marginally undervalued.
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Financial system development and economic growth in selected African countries: evidence from a panel cointegration analysis
- Authors: Starkey, Randall Ashley
- Date: 2011
- Subjects: Economic development -- Africa Economic development -- Developing countries Banks and banking -- Africa Banks and banking -- Developing countries Stock exchanges -- Africa Stock exchanges -- Developing countries Econometric models Economic policy -- Africa Economic policy -- Developing countries
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:979 , http://hdl.handle.net/10962/d1002713
- Description: Financial systems (i.e. banking systems and stock markets) can influence economic growth by performing the five key financial functions, namely: mobilising savings, allocating capital, easing of exchange, monitoring and exerting corporate governance, as well as ameliorating risk. The level of development of the financial system is a key determinant of how effectively and efficiently these functions are performed. This study examines the short-run and long-run relationships between financial system development and economic growth for a panel of seven African countries (namely: Egypt, Ivory Coast, Kenya, Morocco, Nigeria, South Africa and Tunisia) covering the period 1988 to 2008. While numerous empirical studies have researched this topic, none of the previous African empirical literature have investigated thjs by using three groups of financial development measures (i.e. overall financial development, banking system development and stock market development measures) as well as employing panel cointegration analyses. The investigation of the long-run finance-growth relationship is conducted using two methods; the Pedroni panel cointegration approach and the Kao panel cointegration technique. The Pedroni panel cointegracion approach is more often applied in empirical research as it has less restrictive deterministic trend assumptions, while the Kao panel cointegration technique is employed in this study for comparison purposes. Furthermore, the short-run linkages bet\veen financial development and economic growth are analysed using the Holtz-Eakin d of (1989) panel Granger causality test. The results of the Pedroni cointegration tests show that there are long-run relationships between overall financial development (measured by LOFD and OFD2) and economic growth, banking system development (measured by LPSC) and economic growth, as well as stock marker development (measured by LMCP and LVLT) and economic growth. In contrast, the Kao test fails to find any cointegration between finance and growth. However, on the balance, findings largely support a conclusion of cointegration between financial development and economic growth since the Pedroni approach is more appropriate for examining cointegration in heterogeneous panels. Estimates of these long-run cointegrating relationships show that all five financial development measures have the expected positive linkages with growth. However, only four of the five financial development measures were found to have significant long-run linkages with growth, as the relationship between LOFD and growth was not found to be significant in the long-run. The panel Granger causality results show that economic growth Granger causes banking system development in the short-run (i.e. there is demand-following finance), irrespective of the measure of banking development used. While there is bi-directional, reciprocal causality between economic growth and both of the measures of overall financial development and one measure of srock market development (i.e. LVLT). Thus, pulicy makers should focus on formulating policy which promotes faster paced economic growth so as to stimulate financial development, while at the same time encourage policy that promotes the balanced expansion of the banking systems and srock markets in ordet to augment economic growth.
- Full Text:
- Authors: Starkey, Randall Ashley
- Date: 2011
- Subjects: Economic development -- Africa Economic development -- Developing countries Banks and banking -- Africa Banks and banking -- Developing countries Stock exchanges -- Africa Stock exchanges -- Developing countries Econometric models Economic policy -- Africa Economic policy -- Developing countries
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:979 , http://hdl.handle.net/10962/d1002713
- Description: Financial systems (i.e. banking systems and stock markets) can influence economic growth by performing the five key financial functions, namely: mobilising savings, allocating capital, easing of exchange, monitoring and exerting corporate governance, as well as ameliorating risk. The level of development of the financial system is a key determinant of how effectively and efficiently these functions are performed. This study examines the short-run and long-run relationships between financial system development and economic growth for a panel of seven African countries (namely: Egypt, Ivory Coast, Kenya, Morocco, Nigeria, South Africa and Tunisia) covering the period 1988 to 2008. While numerous empirical studies have researched this topic, none of the previous African empirical literature have investigated thjs by using three groups of financial development measures (i.e. overall financial development, banking system development and stock market development measures) as well as employing panel cointegration analyses. The investigation of the long-run finance-growth relationship is conducted using two methods; the Pedroni panel cointegration approach and the Kao panel cointegration technique. The Pedroni panel cointegracion approach is more often applied in empirical research as it has less restrictive deterministic trend assumptions, while the Kao panel cointegration technique is employed in this study for comparison purposes. Furthermore, the short-run linkages bet\veen financial development and economic growth are analysed using the Holtz-Eakin d of (1989) panel Granger causality test. The results of the Pedroni cointegration tests show that there are long-run relationships between overall financial development (measured by LOFD and OFD2) and economic growth, banking system development (measured by LPSC) and economic growth, as well as stock marker development (measured by LMCP and LVLT) and economic growth. In contrast, the Kao test fails to find any cointegration between finance and growth. However, on the balance, findings largely support a conclusion of cointegration between financial development and economic growth since the Pedroni approach is more appropriate for examining cointegration in heterogeneous panels. Estimates of these long-run cointegrating relationships show that all five financial development measures have the expected positive linkages with growth. However, only four of the five financial development measures were found to have significant long-run linkages with growth, as the relationship between LOFD and growth was not found to be significant in the long-run. The panel Granger causality results show that economic growth Granger causes banking system development in the short-run (i.e. there is demand-following finance), irrespective of the measure of banking development used. While there is bi-directional, reciprocal causality between economic growth and both of the measures of overall financial development and one measure of srock market development (i.e. LVLT). Thus, pulicy makers should focus on formulating policy which promotes faster paced economic growth so as to stimulate financial development, while at the same time encourage policy that promotes the balanced expansion of the banking systems and srock markets in ordet to augment economic growth.
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Inflation threshold and nonlinearity: implications for inflation targeting in South Africa
- Authors: Morar, Derwina
- Date: 2011
- Subjects: Inflation targeting -- South Africa Interest rates -- Effect of inflation on -- South Africa Monetary policy -- South Africa Economic development -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:984 , http://hdl.handle.net/10962/d1002718
- Description: Following many other central banks around the world, the South African Reserve Bank has adopted inflation targeting as its monetary policy framework. The aim of this is to achieve low levels of inflation in order to attain price stability thereby promoting growth. In South Africa, the chosen band to target is 3%–6%. This has been criticised by many trade unions who are calling for the abandonment of inflation targeting. Despite targeting 3%–6%, it is not known whether this is the optimal inflation range for South Africa. Therefore, the aim of this study is to determine the inflation threshold level for South Africa using quarterly data for the period 1983 to 2010. The first section determines whether or not there is a long-run relationship between inflation and growth using the Johansen cointegration method. Exogeneity tests determine the causality between these variables. Vector error correction models are estimated if cointegration is found. The second part determines the threshold level of inflation using the method of conditional least squares. The inflation level that maximises the R-squared value and minimises the residual sum of squares gives an indication of the threshold level. The third part of the study determines whether or not inflation volatility has a significant impact on growth. The first part established that there is long-run comovement between inflation and growth.The causality is bidirectional with both variables being endogenous.Findings regarding the threshold level show that the current inflation targeting band of 3%–6% may be extended up to 9.5%. In addition, the range of inflation from 5.5% to 6.5% promotes economic growth in South Africa. Finally, the evidence suggests that inflation volatility does not have a significant impact on economic growth and the focus of policy should be directed towards the level of inflation as has been the case.
- Full Text:
- Authors: Morar, Derwina
- Date: 2011
- Subjects: Inflation targeting -- South Africa Interest rates -- Effect of inflation on -- South Africa Monetary policy -- South Africa Economic development -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:984 , http://hdl.handle.net/10962/d1002718
- Description: Following many other central banks around the world, the South African Reserve Bank has adopted inflation targeting as its monetary policy framework. The aim of this is to achieve low levels of inflation in order to attain price stability thereby promoting growth. In South Africa, the chosen band to target is 3%–6%. This has been criticised by many trade unions who are calling for the abandonment of inflation targeting. Despite targeting 3%–6%, it is not known whether this is the optimal inflation range for South Africa. Therefore, the aim of this study is to determine the inflation threshold level for South Africa using quarterly data for the period 1983 to 2010. The first section determines whether or not there is a long-run relationship between inflation and growth using the Johansen cointegration method. Exogeneity tests determine the causality between these variables. Vector error correction models are estimated if cointegration is found. The second part determines the threshold level of inflation using the method of conditional least squares. The inflation level that maximises the R-squared value and minimises the residual sum of squares gives an indication of the threshold level. The third part of the study determines whether or not inflation volatility has a significant impact on growth. The first part established that there is long-run comovement between inflation and growth.The causality is bidirectional with both variables being endogenous.Findings regarding the threshold level show that the current inflation targeting band of 3%–6% may be extended up to 9.5%. In addition, the range of inflation from 5.5% to 6.5% promotes economic growth in South Africa. Finally, the evidence suggests that inflation volatility does not have a significant impact on economic growth and the focus of policy should be directed towards the level of inflation as has been the case.
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Monetary policy transmission in South Africa: a comparative analysis of credit and exchange rate channels
- Authors: Sebitso, Nathaniel Maemu
- Date: 2011
- Subjects: Monetary policy -- South Africa , Foreign exchange market -- South Africa , Financial crises -- South Africa , South Africa -- Economic conditions , South Africa -- Economic policy , Banks and banking -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1129 , http://hdl.handle.net/10962/d1020851
- Description: This thesis focuses on monetary policy transmission and particularly seeks to examine the impact of credit and exchange rate channels of monetary policy transmission in the South African economy. South Africa's monetary policy has gone through several changes over the past thirty years. In this respect, there is a need for robust empirical evidence on the effects of these channels on inflation and output. The thesis employs a structural vector autoregressive (SVAR) model to identify monetary transmission in South Africa for the period 1994:q4 - 2008:q2. The form of the SVAR used in this thesis is based on the fact that South Africa is a small open economy, which means that external shocks are an important driver of domestic activity. The impulse responses and variance decomposition results show that the repo rate, credit and exchange rate play a role in terms of their impact on inflation and output. The dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the importance of the interest rate channel. A shock to the interest rate, increasing it by one standard deviation, results in a persistent fall in credit. The response of output is immediate as it falls and bottoms out within the second year. Inflation shows a lagged response, it is positive within the first year as the exchange rate depreciates but in subsequent quarters inflation responds negatively as expected. Inflation falls and reaches a minimum by approximately eight quarters then moves towards baseline. The exchange rate shows delayed appreciation. The shock to the repo interest rate leads to an immediate depreciation of the exchange rate in the first two quarters as output declines, followed by an appreciation in the third and sixth quarter. Due to larger error bounds the impact of the repo rate on the exchange rate could be less effective within the first two years. The impulse responses suggest that monetary policy plays an effective role in stabilising the economy in response to a credit shock, notwithstanding large standard error bounds. Hence, the monetary authority reacts by increasing the repo rate as a result of inflation. The impact of credit on output is positive but is offset to some extent by the rising repo rate. In response to the rand appreciation, the monetary authority reduces the repo rate significantly during the first year with the maximum impact in the second year and then returns to baseline thereafter. Therefore the monetary authority reduces the repo rate, probably to stabilise falling inflation. The result shows that inflation falls as a result of the rand appreciation. A shock to the exchange rate causes a rise in output, though small in magnitude, which is persistent but reaches baseline at the end of the period. This result could reflect the effects of the resultant fall in the repo rate and a persistent rise in credit over the whole period, which tends to increase output. The exchange rate shows an obvious and stronger immediate impact on inflation compared to credit impact on inflation. However, the credit shock has an obvious and stronger impact on output compared to an exchange rate impact on output. However, the large standard error bounds may imply that credit and exchange rate channels are not as effective in the short run. It is important to note that the results are based on the SVAR model estimated with percentage growth rate of the variables. The variance decomposition result is in line with the impulse responses and shows that the exchange rate and credit channels could be important transmission channels in South Africa over the chosen sample period. The exchange rate and credit shocks show a stronger effect on inflation than on output, looking at both the impulse responses and variance decomposition results. The reaction of the repo interest rate to the credit and exchange rate shocks comes out as expected. The repo rate increases as a result of an increase in the credit and falls as a result of the currency appreciation.
- Full Text:
- Authors: Sebitso, Nathaniel Maemu
- Date: 2011
- Subjects: Monetary policy -- South Africa , Foreign exchange market -- South Africa , Financial crises -- South Africa , South Africa -- Economic conditions , South Africa -- Economic policy , Banks and banking -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1129 , http://hdl.handle.net/10962/d1020851
- Description: This thesis focuses on monetary policy transmission and particularly seeks to examine the impact of credit and exchange rate channels of monetary policy transmission in the South African economy. South Africa's monetary policy has gone through several changes over the past thirty years. In this respect, there is a need for robust empirical evidence on the effects of these channels on inflation and output. The thesis employs a structural vector autoregressive (SVAR) model to identify monetary transmission in South Africa for the period 1994:q4 - 2008:q2. The form of the SVAR used in this thesis is based on the fact that South Africa is a small open economy, which means that external shocks are an important driver of domestic activity. The impulse responses and variance decomposition results show that the repo rate, credit and exchange rate play a role in terms of their impact on inflation and output. The dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the importance of the interest rate channel. A shock to the interest rate, increasing it by one standard deviation, results in a persistent fall in credit. The response of output is immediate as it falls and bottoms out within the second year. Inflation shows a lagged response, it is positive within the first year as the exchange rate depreciates but in subsequent quarters inflation responds negatively as expected. Inflation falls and reaches a minimum by approximately eight quarters then moves towards baseline. The exchange rate shows delayed appreciation. The shock to the repo interest rate leads to an immediate depreciation of the exchange rate in the first two quarters as output declines, followed by an appreciation in the third and sixth quarter. Due to larger error bounds the impact of the repo rate on the exchange rate could be less effective within the first two years. The impulse responses suggest that monetary policy plays an effective role in stabilising the economy in response to a credit shock, notwithstanding large standard error bounds. Hence, the monetary authority reacts by increasing the repo rate as a result of inflation. The impact of credit on output is positive but is offset to some extent by the rising repo rate. In response to the rand appreciation, the monetary authority reduces the repo rate significantly during the first year with the maximum impact in the second year and then returns to baseline thereafter. Therefore the monetary authority reduces the repo rate, probably to stabilise falling inflation. The result shows that inflation falls as a result of the rand appreciation. A shock to the exchange rate causes a rise in output, though small in magnitude, which is persistent but reaches baseline at the end of the period. This result could reflect the effects of the resultant fall in the repo rate and a persistent rise in credit over the whole period, which tends to increase output. The exchange rate shows an obvious and stronger immediate impact on inflation compared to credit impact on inflation. However, the credit shock has an obvious and stronger impact on output compared to an exchange rate impact on output. However, the large standard error bounds may imply that credit and exchange rate channels are not as effective in the short run. It is important to note that the results are based on the SVAR model estimated with percentage growth rate of the variables. The variance decomposition result is in line with the impulse responses and shows that the exchange rate and credit channels could be important transmission channels in South Africa over the chosen sample period. The exchange rate and credit shocks show a stronger effect on inflation than on output, looking at both the impulse responses and variance decomposition results. The reaction of the repo interest rate to the credit and exchange rate shocks comes out as expected. The repo rate increases as a result of an increase in the credit and falls as a result of the currency appreciation.
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The relationship between financial development and manufacturing sector growth: evidence from Southern African Customs Union countries
- Authors: Moshabesha, Mosili
- Date: 2011
- Subjects: Economic development -- Case studies -- Africa, Southern Entrepreneurship -- Case studies -- Africa, Southern Southern African Customs Union
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:990 , http://hdl.handle.net/10962/d1002725
- Description: Extensive research has been done on the relationship between financial development (FD) and growth (with the main focus on economic growth). Theoretical models and most of the conclusions reached stipulate that the development of a financial system is one of the essential ingredients for economic growth. A developed financial system is able to provide financial services efficiently to the real sector. This study examines the relationship between FD and manufacturing sector growth of the SACU countries. The study first reviews the theoretical and empirical literature of FD and growth (economic and manufacturing sector). This gives a full understanding of the topic before attempting to empirically study it. It also helps in the selection process of the model and variables to be employed in the study. A balanced panel for four SACU countries, namely Botswana, Lesotho, RSA and Swaziland, for the period 1976 to 2008 was estimated using Zellner‟s Seemingly Unrelated Regression Estimation (SURE) method. Namibia was omitted because of limited data. The SURE model was selected because it performs better than ordinary least squares (OLS) estimation of individual equations in cases where the countries studied can be affected by similar external shocks because they are in the same economic region and also have country specific structural differences which could affect their economic growth. Two measures of FD were used: credit to the private sector provided by commercial banks (FIC) and the ratio of liquid liabilities of commercial banks to GDP (LL). Manufacturing sector growth was measured by manufacturing value added to GDP. The results of the relationship between manufacturing growth and FD were very weak across the countries. The model that used FIC performed better, there was a negative significant relationship found in RSA and Swaziland, while with the model that used LL, all the countries gave an insignificant relationship. The results for Swaziland were very consistent with the past findings of the relationship between FD and economic growth in the country (for example Aziakpono (2005a)). This may be because of the high share of the manufacturing sector in GDP. Theory suggests that a well-developed financial system will have a positive impact on growth, but this was not the case in RSA and Botswana, where in some cases FD had a negative impact on the growth of the sector. The analysis of the countries‟ manufacturing sector development shows that the sector plays an important role in the economies of the SACU countries, especially in terms of employment and exports. The coefficients of trade openness are generally positive, though not significant in some cases. The other control variables gave mixed results across the counties and across the models. Based on the findings, the countries have to develop strategies that will improve entrepreneurial skills. Also the financial development in the small SACU countries is essential in order for all the sectors in the economy to benefit from the financial sector and in turn increase economic growth.
- Full Text:
- Authors: Moshabesha, Mosili
- Date: 2011
- Subjects: Economic development -- Case studies -- Africa, Southern Entrepreneurship -- Case studies -- Africa, Southern Southern African Customs Union
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:990 , http://hdl.handle.net/10962/d1002725
- Description: Extensive research has been done on the relationship between financial development (FD) and growth (with the main focus on economic growth). Theoretical models and most of the conclusions reached stipulate that the development of a financial system is one of the essential ingredients for economic growth. A developed financial system is able to provide financial services efficiently to the real sector. This study examines the relationship between FD and manufacturing sector growth of the SACU countries. The study first reviews the theoretical and empirical literature of FD and growth (economic and manufacturing sector). This gives a full understanding of the topic before attempting to empirically study it. It also helps in the selection process of the model and variables to be employed in the study. A balanced panel for four SACU countries, namely Botswana, Lesotho, RSA and Swaziland, for the period 1976 to 2008 was estimated using Zellner‟s Seemingly Unrelated Regression Estimation (SURE) method. Namibia was omitted because of limited data. The SURE model was selected because it performs better than ordinary least squares (OLS) estimation of individual equations in cases where the countries studied can be affected by similar external shocks because they are in the same economic region and also have country specific structural differences which could affect their economic growth. Two measures of FD were used: credit to the private sector provided by commercial banks (FIC) and the ratio of liquid liabilities of commercial banks to GDP (LL). Manufacturing sector growth was measured by manufacturing value added to GDP. The results of the relationship between manufacturing growth and FD were very weak across the countries. The model that used FIC performed better, there was a negative significant relationship found in RSA and Swaziland, while with the model that used LL, all the countries gave an insignificant relationship. The results for Swaziland were very consistent with the past findings of the relationship between FD and economic growth in the country (for example Aziakpono (2005a)). This may be because of the high share of the manufacturing sector in GDP. Theory suggests that a well-developed financial system will have a positive impact on growth, but this was not the case in RSA and Botswana, where in some cases FD had a negative impact on the growth of the sector. The analysis of the countries‟ manufacturing sector development shows that the sector plays an important role in the economies of the SACU countries, especially in terms of employment and exports. The coefficients of trade openness are generally positive, though not significant in some cases. The other control variables gave mixed results across the counties and across the models. Based on the findings, the countries have to develop strategies that will improve entrepreneurial skills. Also the financial development in the small SACU countries is essential in order for all the sectors in the economy to benefit from the financial sector and in turn increase economic growth.
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An analysis of the money market linkages between South Africa and selected major world economies
- Authors: Barnor, Joel A
- Date: 2009
- Subjects: South African Reserve Bank , Banks and banking, Central -- South Africa , Money market -- South Africa , Monetary policy -- South Africa , Foreign exchange rates -- South Africa , International economic relations , Interest rates -- South Africa , Financial institutions -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:956 , http://hdl.handle.net/10962/d1002690 , South African Reserve Bank , Banks and banking, Central -- South Africa , Money market -- South Africa , Monetary policy -- South Africa , Foreign exchange rates -- South Africa , International economic relations , Interest rates -- South Africa , Financial institutions -- South Africa
- Description: Globalisation and financial liberalisation has increased the linkages across countries in recent times. The existence of money market links has important implications for both domestic monetary policy and for investment decisions. This study examines the linkages between South Africa’s money market and selected major international money markets. The objectives of the study are firstly to examine the links between the repo rate of South Africa and the central bank rates of the EU, Japan, UK and US. Secondly, is to compare the influence of domestic and foreign monetary policy decisions on South Africa’s money market. The third objective is to examine the long run relationship between the South African money market and the money markets of its major trading partners. Three estimation techniques are used to examine the different links. Principal components analysis, four tests of cointegration, and stationarity tests of the spreads/risk premium between South Africa’s interest rates and the interest rates of the other countries. All three techniques show that there is no long-run link between South Africa’s central bank rates and the central bank rates of the other countries. This shows that the repo rate does not depend on movements in other central bank rates. Domestic money market interest rates respond strongly to changes in the repo rate whilst showing no dependence on central bank rates of the other countries. This confirms the autonomy of the South African Reserve Bank in carrying out policy objectives. When the risk premium is accounted for under the third technique, evidence of integration is found. This indicates that the risk premium plays a crucial part in the level of integration between South Africa and the countries included in the study.
- Full Text:
- Authors: Barnor, Joel A
- Date: 2009
- Subjects: South African Reserve Bank , Banks and banking, Central -- South Africa , Money market -- South Africa , Monetary policy -- South Africa , Foreign exchange rates -- South Africa , International economic relations , Interest rates -- South Africa , Financial institutions -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:956 , http://hdl.handle.net/10962/d1002690 , South African Reserve Bank , Banks and banking, Central -- South Africa , Money market -- South Africa , Monetary policy -- South Africa , Foreign exchange rates -- South Africa , International economic relations , Interest rates -- South Africa , Financial institutions -- South Africa
- Description: Globalisation and financial liberalisation has increased the linkages across countries in recent times. The existence of money market links has important implications for both domestic monetary policy and for investment decisions. This study examines the linkages between South Africa’s money market and selected major international money markets. The objectives of the study are firstly to examine the links between the repo rate of South Africa and the central bank rates of the EU, Japan, UK and US. Secondly, is to compare the influence of domestic and foreign monetary policy decisions on South Africa’s money market. The third objective is to examine the long run relationship between the South African money market and the money markets of its major trading partners. Three estimation techniques are used to examine the different links. Principal components analysis, four tests of cointegration, and stationarity tests of the spreads/risk premium between South Africa’s interest rates and the interest rates of the other countries. All three techniques show that there is no long-run link between South Africa’s central bank rates and the central bank rates of the other countries. This shows that the repo rate does not depend on movements in other central bank rates. Domestic money market interest rates respond strongly to changes in the repo rate whilst showing no dependence on central bank rates of the other countries. This confirms the autonomy of the South African Reserve Bank in carrying out policy objectives. When the risk premium is accounted for under the third technique, evidence of integration is found. This indicates that the risk premium plays a crucial part in the level of integration between South Africa and the countries included in the study.
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Integration between the South African and international bond markets : implications for portfolio diversification
- Authors: Rabana, Phomolo
- Date: 2009
- Subjects: Bond market , Bond market -- South Africa , Principal components analysis , International finance , Foreign exchange rates -- South Africa , Investments -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:947 , http://hdl.handle.net/10962/d1002681 , Bond market , Bond market -- South Africa , Principal components analysis , International finance , Foreign exchange rates -- South Africa , Investments -- South Africa
- Description: International bond market linkages are examined using monthly bond yield data and total return indices on government bonds with ten years to maturity. The bond yield data covers a nineteen-year period from January 1990 to July 2008, while the bond total return index data covers a nine-year period from August 2000 to July 2008. The international bond markets included in the study are Australia, Canada, Germany, Japan, the United Kingdom, and the United States. The examination of international bond market linkages across these markets has important implications for the formulation of effective portfolio diversification strategies. The empirical analysis is carried out in three phases: the preliminary analysis, the principal component analysis (PCA), and the cointegration analysis. For each analysis and for each set of data the full sample period is first analysed and subsequently a five-year rolling window approach is implemented. Accordingly, this makes it possible to capture the time-varying nature of international bond market linkages. The preliminary analysis examines the bond market trends over the sample period, provides descriptive statistics, and reports the correlation coefficients between the selected bond markets. The PCA investigates the interrelationships among the bond markets according to their common sources of movement and identifies which markets tend to move together. The cointegration analysis is carried out using the Johansen cointegration procedure and investigates whether there is long-run comovement between South Africa and the selected bond markets. Where cointegration is found, Vector Error-Correction Models (VECMs) are estimated in order to examine the long-run equilibrium relationships in addition to their short-run adjustments over time. The empirical analysis results were robust, and overall integration between SA and the selected major bond markets remained weak and sporadic. In addition, the results showed that even after accounting for exchange rate differentials, international bond market diversification remained beneficial for a South African investor; and since international bond market linkages remained weak with no observable trend, international bond market diversification will remain beneficial for some time to come for a South African investor.
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- Authors: Rabana, Phomolo
- Date: 2009
- Subjects: Bond market , Bond market -- South Africa , Principal components analysis , International finance , Foreign exchange rates -- South Africa , Investments -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:947 , http://hdl.handle.net/10962/d1002681 , Bond market , Bond market -- South Africa , Principal components analysis , International finance , Foreign exchange rates -- South Africa , Investments -- South Africa
- Description: International bond market linkages are examined using monthly bond yield data and total return indices on government bonds with ten years to maturity. The bond yield data covers a nineteen-year period from January 1990 to July 2008, while the bond total return index data covers a nine-year period from August 2000 to July 2008. The international bond markets included in the study are Australia, Canada, Germany, Japan, the United Kingdom, and the United States. The examination of international bond market linkages across these markets has important implications for the formulation of effective portfolio diversification strategies. The empirical analysis is carried out in three phases: the preliminary analysis, the principal component analysis (PCA), and the cointegration analysis. For each analysis and for each set of data the full sample period is first analysed and subsequently a five-year rolling window approach is implemented. Accordingly, this makes it possible to capture the time-varying nature of international bond market linkages. The preliminary analysis examines the bond market trends over the sample period, provides descriptive statistics, and reports the correlation coefficients between the selected bond markets. The PCA investigates the interrelationships among the bond markets according to their common sources of movement and identifies which markets tend to move together. The cointegration analysis is carried out using the Johansen cointegration procedure and investigates whether there is long-run comovement between South Africa and the selected bond markets. Where cointegration is found, Vector Error-Correction Models (VECMs) are estimated in order to examine the long-run equilibrium relationships in addition to their short-run adjustments over time. The empirical analysis results were robust, and overall integration between SA and the selected major bond markets remained weak and sporadic. In addition, the results showed that even after accounting for exchange rate differentials, international bond market diversification remained beneficial for a South African investor; and since international bond market linkages remained weak with no observable trend, international bond market diversification will remain beneficial for some time to come for a South African investor.
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Interdependence and business cycle transmission between South Africa and the USA, UK, Japan and Germany
- Authors: Mugova, Terrence Tafadzwa
- Date: 2009
- Subjects: International economic relations -- Developing countries , Business cycles -- Developing countries , Economic development -- Developing countries , Industrial policy -- Developing countries , International finance
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:946 , http://hdl.handle.net/10962/d1002680 , International economic relations -- Developing countries , Business cycles -- Developing countries , Economic development -- Developing countries , Industrial policy -- Developing countries , International finance
- Description: The process of globalisation has had a large impact on the world economy over the past three decades. Economic globalisation has manifested itself in the increasing integration of goods and services through international trade and the integration of financial markets. As a consequence the existence of co-movements in economic variables of different countries has become more evident. The extent to which globalisation causes a country’s economy to move together with the rest of the world concerns policy-makers. When such co-movement is significant, the influence of policy-makers on their respective domestic economies is significantly reduced. South Africa re-entered the international economy in the early 1990s when the forces of globalisation, especially for developing countries, seemed to gain momentum. Empirical research such as Kabundi and Loots (2005) found strong evidence of international co-movement between the world business cycle and the South African business cycle, particularly following South Africa’s integration into the global economy. This study examines the relationship and interdependence between South Africa and four of its major developed trading partners. More particularly, the study examines the question of whether business cycles are transmitted from Germany, Japan, US and UK to South Africa, and/or from South Africa to Germany, Japan, the US and UK. The study employs structural vector autoregressive (SVARs) models to analyse monthly data from 1980:01–2008:04 on industrial production, producer prices, short-term interest rates and real effective exchange rates. The results show that South Africa benefits from economic growth in both the UK and US. They also indicate significant price transmission from Germany and Japan to South Africa, with transmission in the opposite direction being statistically insignificant. The impulse response graphs show that a positive one standard deviation shock to both German and Japanese producer prices has a negative impact on South African output (industrial production) growth. Furthermore, South African monetary policy is relatively unresponsive to international monetary policy stances. The findings of this study indicate that South African policymakers need to take into consideration economic performance of the country’s major trading partners, with particular emphasis on the UK and US economies.
- Full Text:
- Authors: Mugova, Terrence Tafadzwa
- Date: 2009
- Subjects: International economic relations -- Developing countries , Business cycles -- Developing countries , Economic development -- Developing countries , Industrial policy -- Developing countries , International finance
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:946 , http://hdl.handle.net/10962/d1002680 , International economic relations -- Developing countries , Business cycles -- Developing countries , Economic development -- Developing countries , Industrial policy -- Developing countries , International finance
- Description: The process of globalisation has had a large impact on the world economy over the past three decades. Economic globalisation has manifested itself in the increasing integration of goods and services through international trade and the integration of financial markets. As a consequence the existence of co-movements in economic variables of different countries has become more evident. The extent to which globalisation causes a country’s economy to move together with the rest of the world concerns policy-makers. When such co-movement is significant, the influence of policy-makers on their respective domestic economies is significantly reduced. South Africa re-entered the international economy in the early 1990s when the forces of globalisation, especially for developing countries, seemed to gain momentum. Empirical research such as Kabundi and Loots (2005) found strong evidence of international co-movement between the world business cycle and the South African business cycle, particularly following South Africa’s integration into the global economy. This study examines the relationship and interdependence between South Africa and four of its major developed trading partners. More particularly, the study examines the question of whether business cycles are transmitted from Germany, Japan, US and UK to South Africa, and/or from South Africa to Germany, Japan, the US and UK. The study employs structural vector autoregressive (SVARs) models to analyse monthly data from 1980:01–2008:04 on industrial production, producer prices, short-term interest rates and real effective exchange rates. The results show that South Africa benefits from economic growth in both the UK and US. They also indicate significant price transmission from Germany and Japan to South Africa, with transmission in the opposite direction being statistically insignificant. The impulse response graphs show that a positive one standard deviation shock to both German and Japanese producer prices has a negative impact on South African output (industrial production) growth. Furthermore, South African monetary policy is relatively unresponsive to international monetary policy stances. The findings of this study indicate that South African policymakers need to take into consideration economic performance of the country’s major trading partners, with particular emphasis on the UK and US economies.
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Macroeconomic convergence within SADC : implications for the formation of a regional monetary union
- Authors: Johns, Michael Ryan
- Date: 2009
- Subjects: Southern African Development Community , Economic and Monetary Union , Common Monetary Area (Organization) , Economic policy -- Africa, Southern , Monetary policy -- Africa, Southern , Monetary unions , Macroeconomics
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1023 , http://hdl.handle.net/10962/d1002758 , Southern African Development Community , Economic and Monetary Union , Common Monetary Area (Organization) , Economic policy -- Africa, Southern , Monetary policy -- Africa, Southern , Monetary unions , Macroeconomics
- Description: Given the growing effect that globalisation and integration has had upon economies and regions, the process of monetary union has become an increasingly topical issue in economic policy debates. This has been driven in part by the experience and successes of the European Monetary Union (EMU), which is widely perceived as beneficial to member countries. The Southern African Development Community (SADC) is an example of a group of countries that has realised that there are benefits that may arise from economic integration. This paper makes use of an interest-rate pass through model to investigate whether the pass-through of monetary policy transmission in ten SADC countries has become more similar between January 1990 and December 2007 using monthly interest rate data. This is done to determine the extent of macroeconomic convergence that prevails within SADC, and consequently establish whether the formation of a regional monetary union is feasible. The results of the empirical pass-through model were robust and show that there are certain countries that have a more efficient and similar monetary transmission process than others. In particular, the countries that form the Common Monetary Area (CMA) and the Southern African Customs Union (SACU) tend to show evidence of convergence in monetary policy transmission, especially since 2000. In addition, from analysis of the long-run pass-through, the results reveal that there is evidence that Malawi and Zambia have shown signs of convergence toward the countries that form the CMA and SACU, in terms of monetary policy transmission. The study concludes that a SADC wide monetary union is currently not feasible based on the evidence provided from the results of the pass-through analysis. Despite this, it can be tentatively suggested that the CMA may be expanded to include Botswana, Malawi and Zambia.
- Full Text:
- Authors: Johns, Michael Ryan
- Date: 2009
- Subjects: Southern African Development Community , Economic and Monetary Union , Common Monetary Area (Organization) , Economic policy -- Africa, Southern , Monetary policy -- Africa, Southern , Monetary unions , Macroeconomics
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1023 , http://hdl.handle.net/10962/d1002758 , Southern African Development Community , Economic and Monetary Union , Common Monetary Area (Organization) , Economic policy -- Africa, Southern , Monetary policy -- Africa, Southern , Monetary unions , Macroeconomics
- Description: Given the growing effect that globalisation and integration has had upon economies and regions, the process of monetary union has become an increasingly topical issue in economic policy debates. This has been driven in part by the experience and successes of the European Monetary Union (EMU), which is widely perceived as beneficial to member countries. The Southern African Development Community (SADC) is an example of a group of countries that has realised that there are benefits that may arise from economic integration. This paper makes use of an interest-rate pass through model to investigate whether the pass-through of monetary policy transmission in ten SADC countries has become more similar between January 1990 and December 2007 using monthly interest rate data. This is done to determine the extent of macroeconomic convergence that prevails within SADC, and consequently establish whether the formation of a regional monetary union is feasible. The results of the empirical pass-through model were robust and show that there are certain countries that have a more efficient and similar monetary transmission process than others. In particular, the countries that form the Common Monetary Area (CMA) and the Southern African Customs Union (SACU) tend to show evidence of convergence in monetary policy transmission, especially since 2000. In addition, from analysis of the long-run pass-through, the results reveal that there is evidence that Malawi and Zambia have shown signs of convergence toward the countries that form the CMA and SACU, in terms of monetary policy transmission. The study concludes that a SADC wide monetary union is currently not feasible based on the evidence provided from the results of the pass-through analysis. Despite this, it can be tentatively suggested that the CMA may be expanded to include Botswana, Malawi and Zambia.
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The impact of macroeconomic and financial factors on the performance of the housing property market in South Africa
- Authors: Kwangware, Debra
- Date: 2009
- Subjects: Microeconomics , Housing -- South Africa , Housing -- Prices -- South Africa , Real property -- South Africa , Interest rates -- South Africa , Foreign exchange rates -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1042 , http://hdl.handle.net/10962/d1005641 , Microeconomics , Housing -- South Africa , Housing -- Prices -- South Africa , Real property -- South Africa , Interest rates -- South Africa , Foreign exchange rates -- South Africa
- Description: This study exammes the impact of macroeconomic and financial variables on the performance of the housing property market in South Africa using monthly data for the period January 1996 to June 2008. Orthogonalised and non-orthogonalised house price returns and real estate returns are utilised as proxies for the housing property market in separate models. Three main issues were empirically analysed in relation to the linkage between selected variables and the housing property market. The first aspect examined the relationship between selected macroeconomic and financial factors and property returns. Secondly, the study examined the influence that a unit shock to each variable has on property returns over a period of time. The third aspect focused on determining the proportion of property returns variation that results from changes in the macroeconomic and financial variables. VAR modelling was thus adopted to empirically analyse these three aspects. The results reveal that house price returns are influenced by most of the macroeconomic and financial variables used in this study. Specifically, the real effective exchange rate, interest rate spread and manufacturing production positively impact on house price returns while the domestic interest rate, the dividend yield and expected inflation have a negative effect. Furthermore, manufacturing production has a lagged effect on house price returns while the real effective exchange rate and domestic interest rate have a contemporaneous effect. Real estate returns are not influenced by most of the variables except for the domestic interest rate and dividend yield which have a negative effect.
- Full Text:
- Authors: Kwangware, Debra
- Date: 2009
- Subjects: Microeconomics , Housing -- South Africa , Housing -- Prices -- South Africa , Real property -- South Africa , Interest rates -- South Africa , Foreign exchange rates -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1042 , http://hdl.handle.net/10962/d1005641 , Microeconomics , Housing -- South Africa , Housing -- Prices -- South Africa , Real property -- South Africa , Interest rates -- South Africa , Foreign exchange rates -- South Africa
- Description: This study exammes the impact of macroeconomic and financial variables on the performance of the housing property market in South Africa using monthly data for the period January 1996 to June 2008. Orthogonalised and non-orthogonalised house price returns and real estate returns are utilised as proxies for the housing property market in separate models. Three main issues were empirically analysed in relation to the linkage between selected variables and the housing property market. The first aspect examined the relationship between selected macroeconomic and financial factors and property returns. Secondly, the study examined the influence that a unit shock to each variable has on property returns over a period of time. The third aspect focused on determining the proportion of property returns variation that results from changes in the macroeconomic and financial variables. VAR modelling was thus adopted to empirically analyse these three aspects. The results reveal that house price returns are influenced by most of the macroeconomic and financial variables used in this study. Specifically, the real effective exchange rate, interest rate spread and manufacturing production positively impact on house price returns while the domestic interest rate, the dividend yield and expected inflation have a negative effect. Furthermore, manufacturing production has a lagged effect on house price returns while the real effective exchange rate and domestic interest rate have a contemporaneous effect. Real estate returns are not influenced by most of the variables except for the domestic interest rate and dividend yield which have a negative effect.
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An analysis of exchange rate pass-through to prices in South Africa
- Authors: Karoro, Tapiwa Daniel
- Date: 2008
- Subjects: Foreign exchange rates -- South Africa , Monetary policy -- South Africa , Inflation (Finance) -- South Africa , Prices -- South Africa , Banks and banking -- South Africa , South Africa -- Economic policy
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:953 , http://hdl.handle.net/10962/d1002687 , Foreign exchange rates -- South Africa , Monetary policy -- South Africa , Inflation (Finance) -- South Africa , Prices -- South Africa , Banks and banking -- South Africa , South Africa -- Economic policy
- Description: The fact that South Africa has a floating exchange rate policy as well as an open trade policy leaves the country’s import, producer and consumer prices susceptible to the effects of exchange rate movements. Given the central role that inflation targeting occupies in South Africa’s monetary policy, it becomes necessary to determine the nature of influence of exchange rate changes on domestic prices. To this end, this thesis examines the magnitude and speed of exchange rate pass-through (ERPT) to import, producer and consumer prices in South Africa. Furthermore, it explores whether the direction and size of changes in the exchange rate have different pass-through effects on import prices, that is, whether the exchange rate pass-through is symmetric or asymmetric. The paper uses monthly data covering the period January 1980 to December 2005. In investigating ERPT, two main stages are identified. The initial stage is the transmission of fluctuations in the exchange rate to import prices, while the second-stage entails the pass-through of changes in import prices to producer and consumer prices. The first stage is estimated using the Johansen (1991) and (1995) cointegration techniques and a vector error correction model (VECM). The second stage pass-through is determined by estimating impulse response and variance decomposition functions, as well as conducting block exogeneity Wald tests. The study follows Wickremasinghe and Silvapulle’s (2004) approach in estimating pass-through asymmetry with respect to appreciations and depreciations. In addition, the thesis adapts the analytical framework of Wickremasinghe and Silvapulle (2004) to investigate the pass-through of large and small changes in the exchange rate to import prices. The results suggest that ERPT in South Africa is incomplete but relatively high. Furthermore, ERPT is found to be higher in periods of rand depreciation than appreciation which supports the binding quantity constraint theory. There is also some evidence that pass-through is higher in periods of small changes than large changes in the exchange rate, which supports the menu cost theory when invoices are denominated in the exporters’ currency.
- Full Text:
- Authors: Karoro, Tapiwa Daniel
- Date: 2008
- Subjects: Foreign exchange rates -- South Africa , Monetary policy -- South Africa , Inflation (Finance) -- South Africa , Prices -- South Africa , Banks and banking -- South Africa , South Africa -- Economic policy
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:953 , http://hdl.handle.net/10962/d1002687 , Foreign exchange rates -- South Africa , Monetary policy -- South Africa , Inflation (Finance) -- South Africa , Prices -- South Africa , Banks and banking -- South Africa , South Africa -- Economic policy
- Description: The fact that South Africa has a floating exchange rate policy as well as an open trade policy leaves the country’s import, producer and consumer prices susceptible to the effects of exchange rate movements. Given the central role that inflation targeting occupies in South Africa’s monetary policy, it becomes necessary to determine the nature of influence of exchange rate changes on domestic prices. To this end, this thesis examines the magnitude and speed of exchange rate pass-through (ERPT) to import, producer and consumer prices in South Africa. Furthermore, it explores whether the direction and size of changes in the exchange rate have different pass-through effects on import prices, that is, whether the exchange rate pass-through is symmetric or asymmetric. The paper uses monthly data covering the period January 1980 to December 2005. In investigating ERPT, two main stages are identified. The initial stage is the transmission of fluctuations in the exchange rate to import prices, while the second-stage entails the pass-through of changes in import prices to producer and consumer prices. The first stage is estimated using the Johansen (1991) and (1995) cointegration techniques and a vector error correction model (VECM). The second stage pass-through is determined by estimating impulse response and variance decomposition functions, as well as conducting block exogeneity Wald tests. The study follows Wickremasinghe and Silvapulle’s (2004) approach in estimating pass-through asymmetry with respect to appreciations and depreciations. In addition, the thesis adapts the analytical framework of Wickremasinghe and Silvapulle (2004) to investigate the pass-through of large and small changes in the exchange rate to import prices. The results suggest that ERPT in South Africa is incomplete but relatively high. Furthermore, ERPT is found to be higher in periods of rand depreciation than appreciation which supports the binding quantity constraint theory. There is also some evidence that pass-through is higher in periods of small changes than large changes in the exchange rate, which supports the menu cost theory when invoices are denominated in the exporters’ currency.
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An empirical analysis of the long-run comovement, dynamic returns linkages and volatility transmission between the world major and the South African stock markets
- Authors: Chinzara, Zivanemoyo
- Date: 2008
- Subjects: Stock exchanges -- South Africa , Globalization -- Economic aspects -- South Africa , International economic relations , Portfolio management -- South Africa , Monetary policy -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:970 , http://hdl.handle.net/10962/d1002704 , Stock exchanges -- South Africa , Globalization -- Economic aspects -- South Africa , International economic relations , Portfolio management -- South Africa , Monetary policy -- South Africa
- Description: The international linkages of stock markets have important implications for cost of capital and portfolio diversification. Recent trends in globalization, financial liberalization and financial innovation raises questions with regard to whether African stock markets are being integrated into world equity markets. This study examines the extent to which the South African (SA) equity market is integrated into the world equity markets using daily data for the period 1995-2007. The study is divided into three main parts, each looking at the different ways in which integration can be considered. The first investigates whether there is long run comovement between the SA and the major global equity markets. Both bivariate and multivariate Johansen (1988) and Johansen and Juselius (1990) cointegration approaches were utilised. Vector Error Correction Models (VECMs) are then estimated for portfolios which show evidence of cointegration. The second part analyses returns linkages using the Vector Autoregressive (VAR), block exogeneity, impulse response and variance decomposition. The third part examines the behaviour of volatility and volatility linkages among the stock markets. Firstly volatility is analysed using the GARCH, EGARCH and GJR GARCH. Simultaneously, the hypothesis that investors receive a premium for investing in more risky stock markets is explored using the GARCH-in mean. The long term trend of volatility is also examined. Volatility linkages are then analysed using the VAR, block exogeneity, impulse response and variance decomposition. The first part established that no bivariate cointegration exists between the SA and any of the stock markets being studied, implying that pairwise portfolio diversification is potentially worthwhile for SA portfolio managers. However, multivariate cointegration exists for some portfolios, with the US, UK, Germany and SA showing evidence of error correction for some of these portfolios. Findings on return linkages is that there are significant returns linkages among the markets, with the US and SA being the most exogenous and most endogenous respectively. Findings regarding volatility are that the volatility in all the markets is inherently asymmetric and that except for the US there is no risk premium in any of the markets. The long term trend of volatility in all the stock markets was found to be relatively stable. The final finding was that significant volatility linkages exist among the markets, with the US being the most exogenous and SA and China showing evidence of bidirectional linkages. Overall, except for volatility linkages, the integration of SA into the global equity markets is still quite low. Thus, both SA and international investors can capitalise on this portfolio diversification potential. On the other hand, policy makers should capitalise on this and make policies that will attract the much needed foreign investors.
- Full Text:
- Authors: Chinzara, Zivanemoyo
- Date: 2008
- Subjects: Stock exchanges -- South Africa , Globalization -- Economic aspects -- South Africa , International economic relations , Portfolio management -- South Africa , Monetary policy -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:970 , http://hdl.handle.net/10962/d1002704 , Stock exchanges -- South Africa , Globalization -- Economic aspects -- South Africa , International economic relations , Portfolio management -- South Africa , Monetary policy -- South Africa
- Description: The international linkages of stock markets have important implications for cost of capital and portfolio diversification. Recent trends in globalization, financial liberalization and financial innovation raises questions with regard to whether African stock markets are being integrated into world equity markets. This study examines the extent to which the South African (SA) equity market is integrated into the world equity markets using daily data for the period 1995-2007. The study is divided into three main parts, each looking at the different ways in which integration can be considered. The first investigates whether there is long run comovement between the SA and the major global equity markets. Both bivariate and multivariate Johansen (1988) and Johansen and Juselius (1990) cointegration approaches were utilised. Vector Error Correction Models (VECMs) are then estimated for portfolios which show evidence of cointegration. The second part analyses returns linkages using the Vector Autoregressive (VAR), block exogeneity, impulse response and variance decomposition. The third part examines the behaviour of volatility and volatility linkages among the stock markets. Firstly volatility is analysed using the GARCH, EGARCH and GJR GARCH. Simultaneously, the hypothesis that investors receive a premium for investing in more risky stock markets is explored using the GARCH-in mean. The long term trend of volatility is also examined. Volatility linkages are then analysed using the VAR, block exogeneity, impulse response and variance decomposition. The first part established that no bivariate cointegration exists between the SA and any of the stock markets being studied, implying that pairwise portfolio diversification is potentially worthwhile for SA portfolio managers. However, multivariate cointegration exists for some portfolios, with the US, UK, Germany and SA showing evidence of error correction for some of these portfolios. Findings on return linkages is that there are significant returns linkages among the markets, with the US and SA being the most exogenous and most endogenous respectively. Findings regarding volatility are that the volatility in all the markets is inherently asymmetric and that except for the US there is no risk premium in any of the markets. The long term trend of volatility in all the stock markets was found to be relatively stable. The final finding was that significant volatility linkages exist among the markets, with the US being the most exogenous and SA and China showing evidence of bidirectional linkages. Overall, except for volatility linkages, the integration of SA into the global equity markets is still quite low. Thus, both SA and international investors can capitalise on this portfolio diversification potential. On the other hand, policy makers should capitalise on this and make policies that will attract the much needed foreign investors.
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Trends and determinants of inward foreign direct investment to South Africa
- Authors: Rusike, Tatonga Gardner
- Date: 2008
- Subjects: International business enterprises -- South Africa , Investments, Foreign -- South Africa , Economic development -- South Africa , Macroeconomics -- South Africa , Foreign exchange rates -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:995 , http://hdl.handle.net/10962/d1002730 , International business enterprises -- South Africa , Investments, Foreign -- South Africa , Economic development -- South Africa , Macroeconomics -- South Africa , Foreign exchange rates -- South Africa
- Description: Foreign direct investment (FDI) is seen as a way to provide the needed capital inflow to stimulate growth in a domestic economy. FDI can also result in increased employment levels, managerial skills and increase in technology. In efforts to attract FDI, host countries have undertaken various policy incentives to attract foreign investors. This study analyses the trends and determinants of inward FDI to South Africa for the period 1975-2005. The study starts by reviewing FDI literature on its determinants and provides the macroeconomic background and FDI related policies undertaken in South Africa. The trend and sectoral analysis provides the actual nature of FDI flows to South Africa. An empirical model linking theoretical and empirical determinants of FDI is estimated using the Johansen cointegration and VECM framework. The study also augments the cointegration framework with impulse response and variance decomposition analyses to complement the long and short run determinants of FDI. Dummy variables are used in each of the estimated FDI models to take into account the possibility of structural breaks. Results show that relative to the size of the economy and to other developing countries, South Africa still receives low levels of inward FDI. Only are few years are exceptional i.e. 1997, 2001 and 2005. From the sectoral distribution, the financial sector is now the major recipient of FDI followed by the mining and manufacturing sectors. The emergence of the financial sector could suggest that FDI motives could have shifted from the natural resource seeking and market seeking to efficiency seeking FDI. The United Kingdom emerges as the major source of FDI to South Africa followed by United States of America and Germany. Empirical analysis indicated that openness, exchange rate and financial development are important long run determinants of FDI. Increased openness and financial development attract FDI while an increase (depreciation) in the exchange rate deters FDI to South Africa. Market size emerges as a short run determinant of FDI although it is declining in importance. Most of the impulse response analysis confirmed the VECM findings. Variance decomposition analysis showed that FDI itself, imports and exchange rate explain a significant amount of the forecast error variance. The influence of market size variable is small and declining over time.
- Full Text:
- Authors: Rusike, Tatonga Gardner
- Date: 2008
- Subjects: International business enterprises -- South Africa , Investments, Foreign -- South Africa , Economic development -- South Africa , Macroeconomics -- South Africa , Foreign exchange rates -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:995 , http://hdl.handle.net/10962/d1002730 , International business enterprises -- South Africa , Investments, Foreign -- South Africa , Economic development -- South Africa , Macroeconomics -- South Africa , Foreign exchange rates -- South Africa
- Description: Foreign direct investment (FDI) is seen as a way to provide the needed capital inflow to stimulate growth in a domestic economy. FDI can also result in increased employment levels, managerial skills and increase in technology. In efforts to attract FDI, host countries have undertaken various policy incentives to attract foreign investors. This study analyses the trends and determinants of inward FDI to South Africa for the period 1975-2005. The study starts by reviewing FDI literature on its determinants and provides the macroeconomic background and FDI related policies undertaken in South Africa. The trend and sectoral analysis provides the actual nature of FDI flows to South Africa. An empirical model linking theoretical and empirical determinants of FDI is estimated using the Johansen cointegration and VECM framework. The study also augments the cointegration framework with impulse response and variance decomposition analyses to complement the long and short run determinants of FDI. Dummy variables are used in each of the estimated FDI models to take into account the possibility of structural breaks. Results show that relative to the size of the economy and to other developing countries, South Africa still receives low levels of inward FDI. Only are few years are exceptional i.e. 1997, 2001 and 2005. From the sectoral distribution, the financial sector is now the major recipient of FDI followed by the mining and manufacturing sectors. The emergence of the financial sector could suggest that FDI motives could have shifted from the natural resource seeking and market seeking to efficiency seeking FDI. The United Kingdom emerges as the major source of FDI to South Africa followed by United States of America and Germany. Empirical analysis indicated that openness, exchange rate and financial development are important long run determinants of FDI. Increased openness and financial development attract FDI while an increase (depreciation) in the exchange rate deters FDI to South Africa. Market size emerges as a short run determinant of FDI although it is declining in importance. Most of the impulse response analysis confirmed the VECM findings. Variance decomposition analysis showed that FDI itself, imports and exchange rate explain a significant amount of the forecast error variance. The influence of market size variable is small and declining over time.
- Full Text:
Financial instability in South Africa : trends and interactions within the financial markets
- Authors: Shikwambana, Jamela
- Date: 2007 , 2013-08-06
- Subjects: Finance -- South Africa , Financial institutions -- South Africa , Economic stabilization -- South Africa , Stock exchanges -- South Africa , Stocks -- Prices -- South Africa , Interest rates -- South Africa , Equilibrium (Economics)
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1043 , http://hdl.handle.net/10962/d1005911 , Finance -- South Africa , Financial institutions -- South Africa , Economic stabilization -- South Africa , Stock exchanges -- South Africa , Stocks -- Prices -- South Africa , Interest rates -- South Africa , Equilibrium (Economics)
- Description: This study seeks to investigate the trends and interactions of market volatility as a source of instability in the South African financial markets. Financial instability can be manifested in the form of banking and currency crisis, institutional failures and extreme asset price volatility. This study, however, focuses on a single aspect of financial instability - asset price volatility. Asset price volatility reflects changes in market expectations as investors react to such changes, and thus on its own is not necessarily a source of instability. However, volatility spillovers can propagate volatility shocks across the market, increasing the risk of widespread instability. Using a combination of graphical and trend analysis as well as more formal estimation techniques, the study examined volatility in the stock, money and foreign exchange markets. To obtain estimates of market volatility, the study experimented with various volatility models that include the GARCH, TARCH and EGARCH. An analysis of volatility interactions and the transmission of volatility shocks across the market is crucial to understanding financial instability. To examine volatility interaction and the transmission of volatility shocks, a VAR model was estimated. This framework allowed us to examine the propagation of shocks across the markets. Volatility in the financial markets was found to be highly persistent and in the case of exchange rates, volatility was also characterised by an increasing trend. Significant linkages between the financial markets were found. The links also extended to the volatility relationship as evidenced by significant volatility spillovers across the markets. While volatility spillovers from the money market were found in the stock market and the foreign exchange market, no volatility spillovers from these markets were found in the money market. Thus the money market was identified as the major source of volatility spillovers and shocks in the financial markets. These results highlighted the role of monetary policy in the financial system, specifically the need to make monetary policy stable and predictable to ensure that interest rate shocks are not an additional source of instability. , KMBT_363 , Adobe Acrobat 9.54 Paper Capture Plug-in
- Full Text:
- Authors: Shikwambana, Jamela
- Date: 2007 , 2013-08-06
- Subjects: Finance -- South Africa , Financial institutions -- South Africa , Economic stabilization -- South Africa , Stock exchanges -- South Africa , Stocks -- Prices -- South Africa , Interest rates -- South Africa , Equilibrium (Economics)
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1043 , http://hdl.handle.net/10962/d1005911 , Finance -- South Africa , Financial institutions -- South Africa , Economic stabilization -- South Africa , Stock exchanges -- South Africa , Stocks -- Prices -- South Africa , Interest rates -- South Africa , Equilibrium (Economics)
- Description: This study seeks to investigate the trends and interactions of market volatility as a source of instability in the South African financial markets. Financial instability can be manifested in the form of banking and currency crisis, institutional failures and extreme asset price volatility. This study, however, focuses on a single aspect of financial instability - asset price volatility. Asset price volatility reflects changes in market expectations as investors react to such changes, and thus on its own is not necessarily a source of instability. However, volatility spillovers can propagate volatility shocks across the market, increasing the risk of widespread instability. Using a combination of graphical and trend analysis as well as more formal estimation techniques, the study examined volatility in the stock, money and foreign exchange markets. To obtain estimates of market volatility, the study experimented with various volatility models that include the GARCH, TARCH and EGARCH. An analysis of volatility interactions and the transmission of volatility shocks across the market is crucial to understanding financial instability. To examine volatility interaction and the transmission of volatility shocks, a VAR model was estimated. This framework allowed us to examine the propagation of shocks across the markets. Volatility in the financial markets was found to be highly persistent and in the case of exchange rates, volatility was also characterised by an increasing trend. Significant linkages between the financial markets were found. The links also extended to the volatility relationship as evidenced by significant volatility spillovers across the markets. While volatility spillovers from the money market were found in the stock market and the foreign exchange market, no volatility spillovers from these markets were found in the money market. Thus the money market was identified as the major source of volatility spillovers and shocks in the financial markets. These results highlighted the role of monetary policy in the financial system, specifically the need to make monetary policy stable and predictable to ensure that interest rate shocks are not an additional source of instability. , KMBT_363 , Adobe Acrobat 9.54 Paper Capture Plug-in
- Full Text:
The demand for broad money (M2) in Botswana
- Authors: Tsheole, Thapelo
- Date: 2007
- Subjects: Monetary policy -- Botswana , Demand for money -- Botswana , Botswana -- Economic conditions , Quantity theory of money
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:966 , http://hdl.handle.net/10962/d1002700 , Monetary policy -- Botswana , Demand for money -- Botswana , Botswana -- Economic conditions , Quantity theory of money
- Description: There has been extensive theoretical and empirical research on the subject of demand for money function. This particularly stems from the important role demand for money plays in macroeconomic analysis, especially in the design and implementation of monetary policy. The increase in studies, especially in developing countries, can also be attributed to a number of factors like: the impact of moving towards flexible exchange rate regimes, globalisation of financial markets, ongoing financial liberalisation, innovations in domestic financial products, the advancement in econometrics techniques and other country-specific events. This study estimates and examines the nature and stability of the demand for broad money (M2) in Botswana. This is particularly important in that the usefulness of a money demand function in the conduct of monetary policy depends crucially on its stability. The stability of the money demand function is crucial in that a stable money demand function would mean that the quantity of money is predictably related to a set of key economic variables linking money and the real economic sector. Therefore, this will help central banks to select appropriate monetary policy actions. Based on the findings, the study also proposes policy interventions. The vast majority of the literature on demand for money has underscored the fact that variable selection and representation, and the framework chosen are the two major issues relevant to modelling and estimation of the demand for money function. In modelling and estimating the demand for money function in Botswana, this study surveys a stream of theoretical and empirical literature on money demand in developed and developing countries, including countries that have similar financial sector similar to Botswana. Due consideration is also given to the macroeconomic and financial sector development in Botswana to help in the identification of the variables that are included in the demand for money equation. Most importantly, this helped in getting meaningful results that are free from theoretical and estimation problems. In particular, this study applied the multivariate cointegration approach as proposed by Johansen (1988) and Johansen and Juselius (1990) to estimate the relationship between broad money (M2), real income, interest rate, South African treasury bill rate, inflation rate and US dollar/pula bilateral exchange rate. The study obtains one unique long run relationship between money and the scale and opportunity cost variables. The coefficients of the long run relationship are then modelled along the general to specific approach as proposed by Campos, Ericsson and Hendry (2005). In this type of approach the general model is reduced by sequential elimination of statistically insignificant variables and checking the validity of the reductions at every stage to ensure congruence of the finally selected parsimonious model. In accordance with the economic quantity theory of money, the long run income elasticity obtained is 0.8021, which is close to the value one (unitary) suggested by economic theory. The coefficients of real income, exchange and inflation rate have the expected positive signs and were significant in the long run. Therefore, the long run demand for money (M2) in Botswana was found to be positively affected by real income, inflation rate and exchange rate. The lack of statistical significant of the own rate of money (88 day commercial bank deposit rate) and the foreign opportunity cost variable (South African Treasury bill rate) is attributed to multi-collinearity problems between these two interest rates. This could be caused by the fact that short term rates in Botswana are very responsive to movements in the money markets rates in South Africa. The short run dynamics of the demand for money function shows the slow speed of adjustment to equilibrium of about 2.9 percent in the first quarter and this is reflective of the lack of sufficient availability of banking services and the low returns on financial assets which could allow economic agents to re-establish equilibrium levels of money holdings faster. The final parsimonious model obtained clearly reflects a well specified stable demand for money function. Therefore, based on the findings we can be precise in stating that targeting a monetary aggregate can be a viable policy for the monetary authorities in Botswana.
- Full Text:
- Authors: Tsheole, Thapelo
- Date: 2007
- Subjects: Monetary policy -- Botswana , Demand for money -- Botswana , Botswana -- Economic conditions , Quantity theory of money
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:966 , http://hdl.handle.net/10962/d1002700 , Monetary policy -- Botswana , Demand for money -- Botswana , Botswana -- Economic conditions , Quantity theory of money
- Description: There has been extensive theoretical and empirical research on the subject of demand for money function. This particularly stems from the important role demand for money plays in macroeconomic analysis, especially in the design and implementation of monetary policy. The increase in studies, especially in developing countries, can also be attributed to a number of factors like: the impact of moving towards flexible exchange rate regimes, globalisation of financial markets, ongoing financial liberalisation, innovations in domestic financial products, the advancement in econometrics techniques and other country-specific events. This study estimates and examines the nature and stability of the demand for broad money (M2) in Botswana. This is particularly important in that the usefulness of a money demand function in the conduct of monetary policy depends crucially on its stability. The stability of the money demand function is crucial in that a stable money demand function would mean that the quantity of money is predictably related to a set of key economic variables linking money and the real economic sector. Therefore, this will help central banks to select appropriate monetary policy actions. Based on the findings, the study also proposes policy interventions. The vast majority of the literature on demand for money has underscored the fact that variable selection and representation, and the framework chosen are the two major issues relevant to modelling and estimation of the demand for money function. In modelling and estimating the demand for money function in Botswana, this study surveys a stream of theoretical and empirical literature on money demand in developed and developing countries, including countries that have similar financial sector similar to Botswana. Due consideration is also given to the macroeconomic and financial sector development in Botswana to help in the identification of the variables that are included in the demand for money equation. Most importantly, this helped in getting meaningful results that are free from theoretical and estimation problems. In particular, this study applied the multivariate cointegration approach as proposed by Johansen (1988) and Johansen and Juselius (1990) to estimate the relationship between broad money (M2), real income, interest rate, South African treasury bill rate, inflation rate and US dollar/pula bilateral exchange rate. The study obtains one unique long run relationship between money and the scale and opportunity cost variables. The coefficients of the long run relationship are then modelled along the general to specific approach as proposed by Campos, Ericsson and Hendry (2005). In this type of approach the general model is reduced by sequential elimination of statistically insignificant variables and checking the validity of the reductions at every stage to ensure congruence of the finally selected parsimonious model. In accordance with the economic quantity theory of money, the long run income elasticity obtained is 0.8021, which is close to the value one (unitary) suggested by economic theory. The coefficients of real income, exchange and inflation rate have the expected positive signs and were significant in the long run. Therefore, the long run demand for money (M2) in Botswana was found to be positively affected by real income, inflation rate and exchange rate. The lack of statistical significant of the own rate of money (88 day commercial bank deposit rate) and the foreign opportunity cost variable (South African Treasury bill rate) is attributed to multi-collinearity problems between these two interest rates. This could be caused by the fact that short term rates in Botswana are very responsive to movements in the money markets rates in South Africa. The short run dynamics of the demand for money function shows the slow speed of adjustment to equilibrium of about 2.9 percent in the first quarter and this is reflective of the lack of sufficient availability of banking services and the low returns on financial assets which could allow economic agents to re-establish equilibrium levels of money holdings faster. The final parsimonious model obtained clearly reflects a well specified stable demand for money function. Therefore, based on the findings we can be precise in stating that targeting a monetary aggregate can be a viable policy for the monetary authorities in Botswana.
- Full Text:
The term structure of interest rates and economic activity in South Africa
- Authors: Shelile, Teboho
- Date: 2007
- Subjects: Finance -- South Africa , Monetary policy -- South Africa , Interest rates -- South Africa , Economic development -- South Africa , South Africa -- Economic conditions -- 21st century
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:994 , http://hdl.handle.net/10962/d1002729 , Finance -- South Africa , Monetary policy -- South Africa , Interest rates -- South Africa , Economic development -- South Africa , South Africa -- Economic conditions -- 21st century
- Description: Many research papers have documented the positive relationship between the slope of the yield curve and future real economic activity in different countries and different time periods. One explanation of this link is based on monetary policy. The forecasting ability of the term spread on economic growth is based on the fact that interest rates reflect the expectations of investors about the future economic situation when deciding about their plans for consumption and investment. This thesis examined the predictive ability of the term structure of interest rates on economic activity, and the effects of different monetary policy regimes on the predictive ability of the term spread. The South African experience offers a unique opportunity to examine this issue, as the country has experienced numerous monetary policy frameworks since the 1970s. The study employed the Generalised Method Moments technique, since it is considered to be more efficient than Ordinary Least Squares. Results presented in this thesis established that the term structure successfully predicted real economic activity during the entire research period with the exception of the last sub-period (2000-2004) when using the multivariate model. In the periods of financial market liberalisation and interest rates deregulation the term structure was found to be a better predictor of economic activity in South Africa. These findings emphasise the importance of considering the prevailing economic environment in testing the term structure theory.
- Full Text:
- Authors: Shelile, Teboho
- Date: 2007
- Subjects: Finance -- South Africa , Monetary policy -- South Africa , Interest rates -- South Africa , Economic development -- South Africa , South Africa -- Economic conditions -- 21st century
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:994 , http://hdl.handle.net/10962/d1002729 , Finance -- South Africa , Monetary policy -- South Africa , Interest rates -- South Africa , Economic development -- South Africa , South Africa -- Economic conditions -- 21st century
- Description: Many research papers have documented the positive relationship between the slope of the yield curve and future real economic activity in different countries and different time periods. One explanation of this link is based on monetary policy. The forecasting ability of the term spread on economic growth is based on the fact that interest rates reflect the expectations of investors about the future economic situation when deciding about their plans for consumption and investment. This thesis examined the predictive ability of the term structure of interest rates on economic activity, and the effects of different monetary policy regimes on the predictive ability of the term spread. The South African experience offers a unique opportunity to examine this issue, as the country has experienced numerous monetary policy frameworks since the 1970s. The study employed the Generalised Method Moments technique, since it is considered to be more efficient than Ordinary Least Squares. Results presented in this thesis established that the term structure successfully predicted real economic activity during the entire research period with the exception of the last sub-period (2000-2004) when using the multivariate model. In the periods of financial market liberalisation and interest rates deregulation the term structure was found to be a better predictor of economic activity in South Africa. These findings emphasise the importance of considering the prevailing economic environment in testing the term structure theory.
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Monetary policy transmission in South Africa: the prime rate-demand for credit phase
- Authors: Lehobo, Limakatso
- Date: 2006
- Subjects: South African Reserve Bank , Monetary policy -- South Africa , Banks and banking -- South Africa , Bank loans -- South Africa , Financial institutions -- South Africa , Finance -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1128 , http://hdl.handle.net/10962/d1020850
- Description: A voluminous literature attempts to explain the various channels of the monetary policy transmission mechanism through which central banks ultimately achieve price stability. However, most research focuses on interest rate pass-through and the demand for money phase, while there is limited research on the demand for credit. This study endeavours to contribute to the understanding of this neglected phase of monetary policy transmission by exploring the response of the real demand for bank credit by the private sector to changes in the real prime rate from 1990:1 to 2004:4 in South Africa. Firstly, the behaviour of the real prime rate in relation to the repo rate is explored using graphical analysis. The study observes that an increase in the repo rate causes an increase in the real prime rate, such that there is always a margin of three or four percentage points between the two rates. Secondly, using secondary data, the Johansen methodology is used to determine the relationship between the demand for bank credit and its determinants (GDP, inflation, real prime rate and real yield on government bonds). Two co-integrating relationships are found. The Gaussian errors from one co-integrating vector are used to model the Vector Error Correction Model, which provides the short-run dynamics and the long-run results, through the use of Eviews 5 software. The results of the study show that while all other variables are negatively related to the demand for bank credit in the long-run, GDP has a positive influence. In the short-run, yield on government bonds and inflation coefficients depict a positive association, while the coefficients of real prime rate and GDP are negative. The error correction coefficient is -0.32, which implies that a 32% adjustment to equilibrium happens in the demand for bank credit in a quarter and that the complete adjustment takes about three quarters to complete. Thirdly, the generalised impulse responses results indicate that the impact on the real prime rate affects the demand for bank credit from the first quarter. The study concludes that the real prime rate has a negative impact on the demand for credit both in the short-run and long-run.
- Full Text:
- Authors: Lehobo, Limakatso
- Date: 2006
- Subjects: South African Reserve Bank , Monetary policy -- South Africa , Banks and banking -- South Africa , Bank loans -- South Africa , Financial institutions -- South Africa , Finance -- South Africa
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1128 , http://hdl.handle.net/10962/d1020850
- Description: A voluminous literature attempts to explain the various channels of the monetary policy transmission mechanism through which central banks ultimately achieve price stability. However, most research focuses on interest rate pass-through and the demand for money phase, while there is limited research on the demand for credit. This study endeavours to contribute to the understanding of this neglected phase of monetary policy transmission by exploring the response of the real demand for bank credit by the private sector to changes in the real prime rate from 1990:1 to 2004:4 in South Africa. Firstly, the behaviour of the real prime rate in relation to the repo rate is explored using graphical analysis. The study observes that an increase in the repo rate causes an increase in the real prime rate, such that there is always a margin of three or four percentage points between the two rates. Secondly, using secondary data, the Johansen methodology is used to determine the relationship between the demand for bank credit and its determinants (GDP, inflation, real prime rate and real yield on government bonds). Two co-integrating relationships are found. The Gaussian errors from one co-integrating vector are used to model the Vector Error Correction Model, which provides the short-run dynamics and the long-run results, through the use of Eviews 5 software. The results of the study show that while all other variables are negatively related to the demand for bank credit in the long-run, GDP has a positive influence. In the short-run, yield on government bonds and inflation coefficients depict a positive association, while the coefficients of real prime rate and GDP are negative. The error correction coefficient is -0.32, which implies that a 32% adjustment to equilibrium happens in the demand for bank credit in a quarter and that the complete adjustment takes about three quarters to complete. Thirdly, the generalised impulse responses results indicate that the impact on the real prime rate affects the demand for bank credit from the first quarter. The study concludes that the real prime rate has a negative impact on the demand for credit both in the short-run and long-run.
- Full Text:
The relationship between interest rates and inflation in South Africa : revisiting Fisher's hypothesis
- Mitchell-Innes, Henry Alexander
- Authors: Mitchell-Innes, Henry Alexander
- Date: 2006
- Subjects: Fisher effect (Economics) , Interest rates -- South Africa , Interest rates -- Effect of inflation -- South Africa , Inflation (Finance) -- South Africa , Monetary policy -- South Africa , Banks and banking, Central -- South Africa , South Africa -- Economic conditions
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:991 , http://hdl.handle.net/10962/d1002726 , Fisher effect (Economics) , Interest rates -- South Africa , Interest rates -- Effect of inflation -- South Africa , Inflation (Finance) -- South Africa , Monetary policy -- South Africa , Banks and banking, Central -- South Africa , South Africa -- Economic conditions
- Description: This thesis investigates the relationship between expected inflation and nominal interest rates in South Africa and the extent to which the Fisher effect hypothesis holds. The hypothesis, proposed by Fisher (1930), that the nominal rate of interest should reflect movements in the expected rate of inflation has been the subject of much empirical research in many industrialised countries. This wealth of literature can be attributed to various factors including the pivotal role that the nominal rate of interest and, perhaps more importantly, the real rate of interest plays in the economy. The validity of the Fisher effect also has important implications for monetary policy and needs to be considered by central banks. Few studies have been conducted in South Africa to validate this important hypothesis. The analysis uses the 3-month bankers’ acceptance rate and the 10-year government bond rate to proxy both short- and long-term interest rates. The existence of a long-run unit proportional relationship between nominal interest rates and expected inflation is tested using Johansen’s cointegration test. The data is analysed for the period April 2000 to July 2005 as the research aims to establish whether the Fisher relationship holds within an inflation targeting monetary policy framework. The short-run Fisher effect is not empirically verified. This is due to the effects of the monetary policy transmission mechanism and implies that short-term nominal interest rates are a good indication of the stance of monetary policy. A long-run cointegrating relationship is established between long-term interest rates and expected inflation. The long-run adjustment is less than unity, which can be attributed to the credibility of the inflation-targeting framework.
- Full Text:
- Authors: Mitchell-Innes, Henry Alexander
- Date: 2006
- Subjects: Fisher effect (Economics) , Interest rates -- South Africa , Interest rates -- Effect of inflation -- South Africa , Inflation (Finance) -- South Africa , Monetary policy -- South Africa , Banks and banking, Central -- South Africa , South Africa -- Economic conditions
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:991 , http://hdl.handle.net/10962/d1002726 , Fisher effect (Economics) , Interest rates -- South Africa , Interest rates -- Effect of inflation -- South Africa , Inflation (Finance) -- South Africa , Monetary policy -- South Africa , Banks and banking, Central -- South Africa , South Africa -- Economic conditions
- Description: This thesis investigates the relationship between expected inflation and nominal interest rates in South Africa and the extent to which the Fisher effect hypothesis holds. The hypothesis, proposed by Fisher (1930), that the nominal rate of interest should reflect movements in the expected rate of inflation has been the subject of much empirical research in many industrialised countries. This wealth of literature can be attributed to various factors including the pivotal role that the nominal rate of interest and, perhaps more importantly, the real rate of interest plays in the economy. The validity of the Fisher effect also has important implications for monetary policy and needs to be considered by central banks. Few studies have been conducted in South Africa to validate this important hypothesis. The analysis uses the 3-month bankers’ acceptance rate and the 10-year government bond rate to proxy both short- and long-term interest rates. The existence of a long-run unit proportional relationship between nominal interest rates and expected inflation is tested using Johansen’s cointegration test. The data is analysed for the period April 2000 to July 2005 as the research aims to establish whether the Fisher relationship holds within an inflation targeting monetary policy framework. The short-run Fisher effect is not empirically verified. This is due to the effects of the monetary policy transmission mechanism and implies that short-term nominal interest rates are a good indication of the stance of monetary policy. A long-run cointegrating relationship is established between long-term interest rates and expected inflation. The long-run adjustment is less than unity, which can be attributed to the credibility of the inflation-targeting framework.
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The yield curve as a forecasting tool : does the yield spread predict recessions in South Africa?
- Authors: Khomo, Melvin Muzi
- Date: 2006
- Subjects: Recessions -- South Africa , Monetary policy -- South Africa , Economic development -- South Africa , Economic indicators -- South Africa , Business cycles -- History -- 20th century , Business cycles -- South Africa , South Africa -- Economic conditions
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1040 , http://hdl.handle.net/10962/d1004722 , Recessions -- South Africa , Monetary policy -- South Africa , Economic development -- South Africa , Economic indicators -- South Africa , Business cycles -- History -- 20th century , Business cycles -- South Africa , South Africa -- Economic conditions
- Description: This paper examines the ability of the yield curve to predict recessions in South Africa, and compares its predictive power with other commonly used variables that include the growth rate in real money supply, changes in stock prices and the index of leading economic indicators. The study also makes an attempt to find out if monetary policy explains the yield spread's predictive power with regards to future economic activity. Regarding methodology, the standard probit model proposed by Estrella and Mishkin (1996) that directly estimates the probability of the economy going into recession is used. Results from this model are compared with a modified probit model suggested by Dueker (1997) that includes a lagged dependent variable. Results presented in the paper provide further evidence that the yield curve, as represented by the yield spread between 3-month and IO-year government paper, can be used to estimate the likelihood of recessions in South Africa. The yield spread can produce recession forecasts up to 18 months, although it's best predictive power is seen at two quarters. Results from the standard probit model and the modified pro bit model with a lagged dependent variable are somewhat similar, although the latter model improves forecasts at shorter horizons up to 3 months. Compared with other indicators, real M3 growth is a noisy indicator and does not provide much information about future recessions, whilst movements in the All-Share index can provide information for up to 12 months but does not do better than the yield curve. The index of leading economic indicators outperforms the yield spread in the short run up to 4 months but the spread performs better at longer horizons. Based on the results from the study, it appears that changes in monetary policy explain the yield spread's predictive power. This is because the yield spread loses its explanatory power when combined with a variable representing the monetary policy stance of the central bank.
- Full Text:
- Authors: Khomo, Melvin Muzi
- Date: 2006
- Subjects: Recessions -- South Africa , Monetary policy -- South Africa , Economic development -- South Africa , Economic indicators -- South Africa , Business cycles -- History -- 20th century , Business cycles -- South Africa , South Africa -- Economic conditions
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1040 , http://hdl.handle.net/10962/d1004722 , Recessions -- South Africa , Monetary policy -- South Africa , Economic development -- South Africa , Economic indicators -- South Africa , Business cycles -- History -- 20th century , Business cycles -- South Africa , South Africa -- Economic conditions
- Description: This paper examines the ability of the yield curve to predict recessions in South Africa, and compares its predictive power with other commonly used variables that include the growth rate in real money supply, changes in stock prices and the index of leading economic indicators. The study also makes an attempt to find out if monetary policy explains the yield spread's predictive power with regards to future economic activity. Regarding methodology, the standard probit model proposed by Estrella and Mishkin (1996) that directly estimates the probability of the economy going into recession is used. Results from this model are compared with a modified probit model suggested by Dueker (1997) that includes a lagged dependent variable. Results presented in the paper provide further evidence that the yield curve, as represented by the yield spread between 3-month and IO-year government paper, can be used to estimate the likelihood of recessions in South Africa. The yield spread can produce recession forecasts up to 18 months, although it's best predictive power is seen at two quarters. Results from the standard probit model and the modified pro bit model with a lagged dependent variable are somewhat similar, although the latter model improves forecasts at shorter horizons up to 3 months. Compared with other indicators, real M3 growth is a noisy indicator and does not provide much information about future recessions, whilst movements in the All-Share index can provide information for up to 12 months but does not do better than the yield curve. The index of leading economic indicators outperforms the yield spread in the short run up to 4 months but the spread performs better at longer horizons. Based on the results from the study, it appears that changes in monetary policy explain the yield spread's predictive power. This is because the yield spread loses its explanatory power when combined with a variable representing the monetary policy stance of the central bank.
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