The purpose of this paper is to examine the interest rate transmission mechanism for South Africa as an emerging economy in a pre-repo and repo system. It explains how the money market rate is transmitted to the retail interest rates both in the long-run and short-run and tests the symmetric and asymmetric interest rate pass-through using the Scholnick (1996) ECM and the Wang and Lee (2009) ECM-EGARCH (1, 1)-M methodology. This permitted the examination of the impact of interest rate volatility, along with the leverage effect. An incomplete pass-through is found in the short-run. From the entire sample period, a symmetric adjustment is found in the deposit rate, which had upward rigidity adjustment, while an asymmetric adjustment is found in the lending rate, with a downward rigidity adjustment. All the adjustments supported the collusive pricing arrangements. According to the conditional variance estimation of the ECM-EGARCH (1, 1), negative volatility impact and leverage effect are present and influential only in the deposit interest rate adjustment process in South Africa.

This study estimates the interdependence between South Africa‟s monetary policy and stock market performance, utilising structural vector autoregression (SVAR) methodology. The study finds that a stock price shock which decrease stock prices by 100 basis points leads to 5 basis points decrease in interbank rate. A monetary policy shock that increases the interbank rate by l percent leads to decrease in real stock prices by 1 percent. This result for South Africa is similar to the result by Bjornland and Leteimo (2009) which earlier concluded that there was a high interdependence between interest rate setting and stock prices. However the magnitude of the relationship is relatively lower for South Africa compared to that of the United States of America (USA). The result of the current study is also very much consistent with the argument that the South African stock market is resource-based and so is influenced by external shocks, meaning monetary policy shock does not have as much impact on stock market in South Africa as in the USA. However the SARB may have to consider watching movements in stock prices so that booms in stock markets do not defeat central bank monetary policy thrusts. The stock price market is an essential source of information for monetary policy in South Africa.

Thesis (MBA)--Stellenbosch University, 2000. / ENGLISH ABSTRACT: The relationship between asset markets and economic growth is well documented in economic literature. Harvey (1989), conducted a study of the relationship between interest rate spreads, share market prices and real economic growth in the USA. He developed a model to forecast real economic growth using interest rate spreads and share market prices and concluded that interest rate spreads produced superior forecasts to those based on share market information. He further established that the forecasts obtained from his simple model, which made no provision for serial correlation, compared favourably with those of leading economic forecasters in the USA. Van der Mescht (1991) undertook a similar study based on interest rate spreads and share market prices in South Africa. He concluded that there were no significant differences between the capital market and share market as predictors of economic growth in South Africa when provision was made in Harvey's model for the effects of serial correlation. His results indicated that both the capital and share markets were able to explain more than 65 percent of the variation in economic growth over the period of his study and that the forecasts were able to accurately predict the turning points in the economy and compared favourably with other leading economic forecasters. A similar study to Van der Mescht's using updated South African data found that in general the conclusions reached by Van der Mescht remain valid. A difference which is evident, however, is that, whereas previously, there was little difference between the results of the interest rate spread and share market index model, the interest rate spread model produced better results over the period of this study (1981 - 1998). / AFRIKAANSE OPSOMMING: Die verwantskap tussen die kapitaal- en aandelemark en ekonomiese groei is deeglik in die ekonomiese literatuur ge-dokumenteer. Harvey (1989) het navorsing gedoen oor die verwantskap tussen die termynstruktuur van rentekoerse, aandelepryse en reële ekonomiese groei in die VSA. Hy het 'n vooruitskattingsmodel ontwikkel vir ekonomiese groei, gebaseer op die termynstruktuur van rentekoerse en aandelepryse en het tot die gevolgtrekking gekom dat die termynstruktuur van rentekoerse 'n beter vooruitskatter van ekonomiese groei is as die aandelemark, en dat sy model, wat geen voorsiening vir outokorrelasie maak nie, goed vergelyk met ander ekonometriese modelle wat ekonomiese groei in die VSA vooruitskat. Van der Mescht (1991) het 'n soortgelyke studie, gebaseer op die termynstruktuur van rentekoerse en aandelepyse in Suid Afrika, onderneem. Hy het tot die gevolgtrekking gekom dat daar geen betekenisvolle verskil is tussen die kapitaal en aandelemark as vooruitskatters van ekonomiese groei indien daar vir outokorrelasie in die modelle voorsiening gemaak word nie. Sy resultate dui aan dat die kapitaal- en aandelemark meer as 65 persent van die persentasieverandering in die ekonomiese groei kon verklaar oor die termyn van sy studie, dat dit akkurate vooruitskattings van die draaipunte in die Suid Afrikaanse ekonomie gelewer het, en dat dit gunstig vergelyk met ander ekonomiese vooruitskatters. 'n Soortgelyke studie as die van Van der Mescht is onderneem, met die jongste inligting omtrent termynstruktuur van rentekoerse en aandelepryse in Suid Afrika. In die algemeen is die gevolgtrekkings van Van der Mescht steeds van toepassing. Daar is egter aangetoon dat, waar daar voorheen geen betekenisvolle verskil tussen die kapitaal- en aandelemark as vooruitskatters van ekonomiese groei was nie, die termynstruktuur van rentekoerse beter resultate oor die termyn van hierdie studie gelewer het. (1981 -1998).

Thesis (MComm)--Stellenbosch University, 2002. / ENGLISH ABSTRACT: This assignment sets out to address the concept of equity duration, where equity duration is viewed as a measure of the interest rate sensitivity of common stock's market value. The traditional use of standard dividend discount models, results in extremely long duration estimates for equities - in the order of 10 years for income stocks to 25 years and more for growth companies whose cash flows are not expected to materialize until some future period. Leibowitz (1986) identified an alternative approach for assessing equity duration empirically. These empirical estimates of actual stock price sensitivity to underlying changes in interest rates imply that equities behave as if they are much shorter duration instruments. Various attempts have been made to reconcile the difference between theoretical predictions of equity duration and empirical findings. The differences in duration of assets in place and growth opportunities are given as a possible reason for the above mentioned differences. It is argued that investment opportunities are similar to options a company has. These option-like characteristics of growth opportunities may alter the basic relationship between equity valuation and interest rate changes. The option framework suggests that the duration of growth companies may be shorter (not longer) than those of assets in place. The results from option theory can however not be applied directly to growth options, since some of the assumptions may not be valid in the case of growth options. The presence of these growth options makes it virtually impossible to calculate equity duration theoretically. This study empirically tests the relationship between growth opportunities and equity duration by focussing the attention on the interest rate sensitivity of South African growth companies. The following hypotheses regarding equity duration and growth companies are postulated: • There is a significant difference in interest rate sensitivity between growth companies and low-growth companies. • There is a significant difference between duration of growth companies measured using nominal interest rates and duration of growth companies using real interest rates. All non-mining companies on the Johannesburg Securities Exchange SA, for the period 1980 to 2000, were analysed. These companies were sorted into different portfolios that reflected their growth opportunities. Market capitalisation, book-to-market and price-earnings ratios were used as proxies to rank companies according to growth opportunities. The results from univariate regressions suggest positive duration for common equities. The negative relationship between equity returns and changes in nominal interest rates are independent of size, book-to-market or price-earnings ratios of the sampled companies. Including the market factor as an independent variable results in markedly different equity duration. The duration is correlated with size, as both coefficients and t-statistics increase when moving from small companies to larger companies. In addition, the small companies have negative not positive duration, as was the case for simple univariate regressions. There is also some evidence that high growth portfolios, as measured by low book-to-market and high price-earnings ratios, are less sensitive to interest rate changes than low growth portfolios. Employing all three Fama and French's factors, there is no longer a cross-sectional dependence on company size, with the mean duration being close to zero and statistically insignificant in virtually all cases. Also, when dividing changes in the nominal interest rate into changes in real rates and changes in inflation, it does not significantly affect the estimates of equity duration. The author found no evidence to support the stated hypotheses, when employing the Fama and French's three factor model. This may mean that the relationships are subsumed in the Fama and French risk factors. / AFRIKAANSE OPSOMMING: Hierdie werkstuk bestudeer die konsep van die duur van gewone aandele (equity duration), waar die duur van 'n gewone aandeel gedefinieer word as 'n maatstaf van die rentekoerssensitiwiteit van die markwaarde van die aandeel. Die tradisionele gebruik van standaard dividend verdiskonterings modelle, lei tot uiters lang duur beramings vir gewone aandele - in die orde van 10 jaar vir inkomste aandele tot 25 jaar en meer vir groei ondernemings wie se kontantvloei nie verwag word om te materialiseer voor 'n sekere toekomstige datum nie. Leibowitz (1986) identifiseer 'n alternatiewe empiriese benadering vir die beraming van gewone aandeel duur. Hierdie empiriese bepaling van die sensitiwiteit van die werklike aandeelprys tot onderliggende veranderings in rentekoerse, impliseer dat gewone aandele reageer asof hulle baie korter duur instrumente is. Verskeie pogings is aangewend om die verskille tussen teoretiese voorspellings van gewone aandeel-duur en empiriese bevindings te rekonsilieer. Die verskille tussen duur van bates in plek en groei-geleenthede word aangevoer as 'n moontlike rede vir bogenoemde verskille. Dit word geargumenteer dat investeringsgeleenthede soortgelyk is aan die opsies wat 'n onderneming het. Hierdie opsie-soortgelyke eienskappe van groei-geleenthede kan die basiese verhouding tussen gewone aandeel waardasie en rentekoers verandering wysig. Die opsie raamwerk dui daarop dat die duur van groei-ondernemings korter kan wees (en nie langer nie) as die van bates in plek. Die resultate van opsie teorie kan egter nie direk toegepas word op groei-opsies nie, aangesien sekere van die aannames nie geldig mag wees in die geval van groei-opsies nie. Die teenwoordigheid van hierdie groei-opsies het tot gevolg dat dit feitlik onmoontlik is om gewone aandeel-duur teoreties te bereken. Die studie toets empiries die verhouding tussen groei-geleenthede en gewone aandeel-duur deur te fokus op die rentekoers sensitiwiteit van Suid Afrikaanse groei-ondernemings. Die volgende hipoteses met betrekking tot die gewone aandele duur en groei-ondernemings word gestel: • Daar is 'n betekenisvolle verskil in rentekoers sensitiwiteit tussen groei-ondernemings en lae groei-ondernemings. • Daar is 'n betekenisvolle verskil tussen duur van groei-ondernemings gemeet deur gebruik te maak van nominale rentekoerse en duur van groei-ondernemings deur gebruik te maak van reële rentekoerse. Alle nie-myn ondernemings op die Johannesburg Sekuriteite Beurs SA, vir die periode 1980 tot 2000, is ontleed. Hierdie ondernemings is gesorteer in verskillende portefeuljes wat hulle groei geleenthede reflekteer. Markkapitalisasie, boek-tot-markwaarde en prysverdienste verhoudings is gebruik as maatstawwe om ondernemings te rangskik volgens groeigeleenthede. Die resultate van enkel veranderlike regressies dui positiewe duur aan vir gewone aandele. Die negatiewe verhouding tussen aandeelopbrengs en verandering in nominale rentekoerse is onafhanklik van grootte, boek-tot-markwaarde of prysverdienste verhoudings vir die getoetste ondernemings. Indien die markfaktor ingesluit word, as 'n onafhanklike veranderlike, lei dit tot opvallend verskillende gewone aandeel-duur. Die duur is gekorreleer met grootte, met beide koëffisiënte en t-statistieke wat styg wanneer beweeg word van klein ondernemings tot groter ondernemings. Addisioneel, die klein ondernemings het negatiewe, nie positiewe duur, anders as in die geval van eenvoudige enkel veranderlike regressies. Daar is ook bewyse dat hoë groei portefeuljes, soos gemeet deur lae boek-tot-markwaarde en hoë prysverdienste verhoudings, minder sensitief is vir rentekoers veranderings as lae groei portefeuljes. Met die aanwending van al drie Fama en French se faktore is daar nie meer kruis-selektiewe afhanklikheid (cross-selectional dependence) op ondernemingsgrootte aanwesig nie, met die gemiddelde duur wat naby nul is en statisties onbedeidend in feitlik all gevalle is. Wanneer die verandering in die nominale rentekoers verdeel word in veranderings in reële koerse en veranderings in inflasie, beïnvloed dit ook nie betekenisvol die bepaalde gewone aandeel duur nie. Die outeur het met die gebruik van die Fama & French drie faktor model geen bewyse gevind wat die vermelde hipoteses staaf nie. Dit mag beteken dat die rente-risiko verwantskappe in die Fama en French risiko faktore vervat is.

M.Com. (Economic Development and Policy Issues) / Monetary policy is not only the process by which the monetary authority of a country controls the supply of money, but is furthermore a sufficient tool to overcome the problem of economic growth and unemployment. This can take place when the policy instruments – interest rates (Repo) and money supply growth (M3) – have significant effects on these macroeconomic variables. However, the issue of the efficacy of monetary policy on GDP growth and employment creation is at the centre of debates among researchers. Some researchers are of the opinion that the objective of monetary policy in achieving and maintaining price stability is founded on the idea that inflation is not good for economic growth, employment creation and income equality but, instead, only secures macroeconomic environment. In South Africa, the efficiency of different monetary policy tools, inflation and money-supply targeting, on economic performance has been questioned. Moreover, the issue of the high level of unemployment remains controversial among scholars. Therefore, the structural vector-error correction model (VECM) methods was used with quarterly data in order to investigate the impact of aggregate money supply (M3), interest rate (Repo) and real exchange rate on CPIX (inflation) , economic growth (GDP volume rate) and unemployment (joblessness rate) in South Africa for the period 1986 to 2010. The results show that both monetary-policy regimes have positively impacted on economic growth, but the impact of the pre-inflation-targeting regime is higher. Moreover, a weak positive liaison between monetary policy and unemployment is observed, but the post-inflation-targeting regime shows a higher percentage decrease in unemployment than the pre-inflation targeting period. Beyond any doubt, the research approves the engagement of the SARB to monitor (target) CPIX (inflation) due to its ability to ensure price stability and create a stable economic environment favourable to economic performance.

South Africa introduced inflation targeting as a monetary policy framework in 2000. This marked a sizable shift in monetary policy management from the previous "eclectic" approach and the explicit focus on M3 money supply before that. The study appraises the effectiveness of monetary policy under this new dispensation. However, the analysis does not centre on inflation outcomes, which can be a measure of effectiveness because they are the overriding objective of the South African Reserve Bank in effect, it is possible to have a target-friendly inflation rate for a length of time despite monetary policy that is ambiguous and encourages unpredictability in market interest rates. However, persistent policy opaqueness can, over time, damage a favourable inflation scenario. For instance, if the public is unsure about the Reserve Bank's desired inflation target, price setting in the wage and goods markets may eventually produce an inflation outcome that is higher than the Bank may have intended. Rather, this study adjudicates the effectiveness of monetary policy within the context of policy transparency, which is an intrinsic part of the inflation targeting framework. The study looks at the extent to which monetary policy transparency has enhanced both the anticipatory nature of the market's response to policy actions and the force that policy has on all interest rates in the financial system, particularly long-term rates. These concepts are important because through the transmission mechanism of monetary policy, the more deft market participants are at anticipating future Reserve Bank policy the greater the Bank's ability to steady the economy before the actual policy event. With the aid of regression models to estimate the response of market rates to policy changes, the results show that there is significant movement in market rates in anticipation of policy action, rather than on the day of the event or the day after. Indeed, the estimates for market rates movement on the day of and even the day after the policy action are generally minute. For instance, the R157 long-term government bond yield changes by a significant 41 basis points in response to a one percentage point change in the Reserve Bank's benchmark repo rate in the period between the last policy action and the day preceding the current action. In contrast, the R157 bond yield changes by an insignificant 2 basis points on the day of the current repo rate change and about 1 basis point the day after the current change. The results point to a robust relationship between policy transparency and the market's ability to foresee rate action. If this were not the case, it is likely that there would be persistent market surprise and, hence, noticeable movement in interest rates on the day of the rate action and perhaps even the day after. Another important observation is that monetary policy impacts significantly on both short- and long-term market rates. Again, certifying the robustness of monetary policy under the inflation targeting regime

It has long been accepted that changes in monetary policy have real economic effects; however, the mechanism by which these policy changes are transmitted to the real economy has been the subject of much debate. Traditionally the transmission mechanism of monetary policy has consisted of various channels which include the money channel, the asset price channel and the exchange rate channel. Recent developments in economic theory have led to a relatively new channel of policy transmission, termed the credit channel. The credit channel consists of the bank lending channel as well as the balance sheet channel, and focuses on the demand for credit as the variable of interest. The credit channel is based on the notion that demanders and suppliers of credit face asymmetric information problems which create a gap between the cost of external funds and the cost of internally generated funds, referred to as the wedge. The aim here is to determine the size and lag length effects of changes in credit demand, by both firms as well as households, as a result of changes in interest rates. A secondary, but subordinate, aim is to test for a balance sheet channel of monetary policy transmission. A vector autoregressive (VAR) model is used in conjunction with causality tests, impulse response functions and variance decompositions to achieve the stated objectives. Results indicate that the interest rate elasticity of credit demand, for both firms and households, is interest inelastic and therefore the monetary policy authorities have a limited ability to influence credit demand in the short as well as medium term. In light of the second aim, only weak evidence of a balance sheet channel of policy transmission is found.

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.

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.

This study investigates the contribution of bank credit extension to the private sector to inflation in South Africa, covering the period 1970:1-2006:4. The long-run impact of bank credit on inflation is investigated by means of the Johansen co integration model. The short-run ynamics of the inflation is subsequently modelled by means of the Vector Error Correction Model (VECM). Using the Johansen methodology, the study identifies two co integrating equations linking inflation and its eterminants. The results suggest that the long-run relationship between inflation and bank credit to the private sector is negative and statistically significant at 10% level. The determinants that are significant at 5% level are: money supply, real gross domestic product, the money market rate, rand/dollar exchange rate and imports. The results are consistent with previous findings. The speed of adjustment in response to deviation from the equilibrium path was found to be negative at 10.56% per quarter, which is consistent with findings by Ohnsorge and Oomes (2003) for Russia. Both the signs and the magnitude of the coefficients suggest that the co integrating vector describes a long-run inflation equation. The impulse response functions confirm the theoretical expectations except for the import prices. The most persistent and significant shocks observed are on impulse response functions of money supply and bank credit to the private sector. The variance decomposition results also suggest that inflation responds quicker to innovations from money supply and the money market rate. The overall results provide evidence that the surge in inflation is associated with an increase in money supply as well as the instability in exchange rate. The effects of exchange rate fluctuation on inflation are reflected through changes in import prices. Based on the results we conclude that an increase in bank credit during the period 1970:1-2006:4 had a negative mpact on inflation in South Africa.