Unemployment is one of the greatest and most complex challenges facing South Africa. Just like most developing countries, South Africa has been using the fiscal policy framework as a tool to alleviate the high rates of unemployment. This study examined the impact of fiscal policy on unemployment in South Africa. The study used annual time series data for the period 1980 to 2010. A vector error correction model was used to determine the effects of fiscal policy aggregates on unemployment in South Africa. The fiscal policy aggregates considered in this study were government investment expenditure, government consumption expenditure and tax. Results from this study revealed that government consumption expenditure and tax have a positive impact on unemployment while government investment expenditure negatively affects unemployment in South Africa. Policy recommendations were made using these results.

Thesis (LL.M.)

Even though major advances in economic theory and modelling have in some cases furthered our understanding of how the economy works, the system as a whole has become more complex. If policymakers had perfect knowledge about the actual state of the economy, the various transmission mechanisms as well as the true underlying model, monetary intervention would be greatly simplified. In reality, however, the monetary authorities have to contend with considerable uncertainty in relation to the above-mentioned factors. This said, uncertainty has mostly been neglected in both the theoretical and empirical literature focusing on monetary policy analysis. Nonetheless, findings from a review of theoretical literature that does exist on this topic suggest that optimal central banks act more conservatively when faced with uncertainty. Similarly, empirical findings from the literature also favour conservatism. However, there is some evidence to suggest that this is not always the case. These results suggest that central banks do not always act optimally when faced with uncertainty. The limited number of industrial country cases examined prevents any generalised view from emerging. If anything, the literature findings suggest that central bank behaviour differs across countries. This thesis aims to contribute to the empirical literature by studying the effects of uncertainty on monetary policy in the developing country case of South Africa. In simplest terms, the thesis seeks to establish whether or not the South African Reserve Bank (SARB) responded optimally to uncertainty as suggested by theoretical models thereof. To this end, the thesis employs a theoretical model which resembles a structural rule-based approach. The optimal interest rate rule was derived given a set of structural equations relating to demand, the Phillips curve and the real exchange rate. To incorporate uncertainty, it is assumed that the coefficients are dependent on the variances of the exogenous variables, namely inflation, the output gap and the exchange rate. The uncertainty adjusted model allows us to investigate whether monetary policy is more aggressive or passive when uncertainty about the relevant exogenous variable increases. Inflation, output gap and exchange rate uncertainty estimates were derived through GARCH-model specifications related to the structural equations as defined in the theoretical model. The investigation considered both indirect and direct uncertainty effects with a sample period stretching from 1990 to 2011. The findings reported in this thesis provide strong evidence in support of the notion that uncertainty plays a significant role within the South African monetary policy landscape and contributes towards explaining the SARB’s actions. Furthermore, the results suggest that the SARB did in fact act optimally in responding more conservatively to target variable fluctuations on average. Also, the findings could potentially strengthen the case for inflation targeting as a monetary policy regime, as the results indicate a marked decline in the effects of uncertainty under inflation targeting than before. / Economics / D. Com. (Economics)

Thesis (PhD)--Stellenbosch University, 2011. / ENGLISH ABSTRACT: The effectiveness of monetary policy depends importantly on the expectations of the private sector, as it is largely through this channel of the transmission mechanism that policy changes are transmitted to long-term interest rates. This has increased the emphasis on the role of central bank communication as a monetary policy tool. Successful communication is essential both to enhance the effectiveness of monetary policy and to build support for the institutional framework within which monetary policy is implemented. While the large and growing literature on central bank communication over the past decade has delivered strong support for the important role of central bank communication, there is less agreement about what the optimal communication strategy is. Furthermore, research has been limited mainly to studies of communication between central banks and the financial markets. In an evaluation of progress in the literature, Blinder et al. (2008) highlight the need to examine the interaction between central banks and the rest of the private sector (the general public) as well. The objective of this PhD dissertation is to evaluate the South African Reserve Bank’s (SARB’s) use of communication as a monetary policy tool. Special focus is given to communication with the inattentive general public, who set prices in the labour market and the market for goods and services. Different aspects of the SARB’s communication were studied, including the consistency of the South African Reserve Bank’s communication, the transmission of this communication via the media to the general public, and the process by which the general public gathers and processes the information on inflation. An evaluation of the SARB’s communications (its original messages) provided some evidence that the SARB has succeeded in communicating consistently over the inflation targeting period. This was followed by an assessment of the role of the media in transmitting the original communications to the general public. The results suggest that South African media reports generally show a lack of critical assessment of monetary policy decisions and that the inter-meeting communication by the SARB is ineffective at influencing these. An important challenge is for the SARB to consider how it can participate more actively in the economic discussion at this level and how it can build productive strategic relationships with the media. The final section of this dissertation explores the process by which the general public forms its inflation expectations, relying on epidemiological models to describe the spread of inflation information and to estimate the speed at which the general public, in aggregate, updates their inflation expectations. This estimate of the speed of adjustment will be valuable to future research that aims to build a Phillips curve in a new way for South Africa. A well-modelled Phillips curve will both improve the monitoring of the impact of monetary policy and inform future policy design and implementation. / AFRIKAANSE OPSOMMING: Die doeltreffendheid van die monetêre beleid is beduidend afhanklik van die verwagtinge in die privaat sektor, aangesien beleid hoofsaaklik deur hierdie kanaal langtermyn rentekoerse beïnvloed. Hierdie bewustheid het die klem op die rol van sentrale bank kommunikasie as ‘n monetêre instrument versterk. Suksesvolle kommunikasie is noodsaaklik om beide die effektiwiteit van monetêre beleid te verseker sowel as om ondersteuning vir die institusionele raamwerk waarbinne die monetêre beleid geïmplimenteer word, te bou. Hoewel daar ‘n groot en groeiende literatuur is wat die belangrikheid van sentrale bank kommunikasie oor die afgelope dekade beklemtoon, is daar nie eenstemmigheid oor wat die optimale kommunikasie strategie behels nie. Daarbenewens is meeste studies beperk tot die kommunikasie tussen monetêre owerhede en die finansiële sektor. In ‘n evaluering van die literatuur het Blinder et al. (2008) die noodsaaklikheid beklemtoon om die wisselwerking tussen monetêre owerhede en die res van die privaat sektor (die publiek) te bestudeer. Die doel van hierdie proefskrif is om die Suid-Afrikaanse Reserwebank (SARB) se gebruik van hierdie kommunikasie instrument te evalueer. Spesiale aandag word geskenk aan kommunikasie met die onoplettende publiek wat pryse bepaal in die arbeidsmark en markte vir goedere en dienste. Verskillende aspekte van die SARB se kommunikasie strategie word bestudeer, insluitende die konsekwentheid van kommunikasie, die oordrag van hierdie kommunikasie via die media aan die publiek, asook die proses waarmee die publiek informasie rakende inflasie versamel en verwerk. ‘n Evaluering van die SARB se kommunikasie (die oorspronklike boodskappe) lewer bewys dat die SARB daarin geslaag het om konsekwent te kommunikeer tydens die inflasie teikeningsperiode. Dit word gevolg deur ‘n evaluering van die rol van die media om oorspronklike informasie suskesvol aan die publiek oor te dra. Die resultate dui daarop dat berigte in die Suid Afrikaanse media oor die algemeen aan kritiese evaluering van die monet.re beleidsbesluite ontbreek en die SARB se kommunikasie tussen monetêre beleidsvergaderings is ook oneffektief gevind. ‘n Belangrike uitdaging vir die SARB is dus om te bepaal hoe dit op hierdie vlak tot die ekonomiese debat kan toetree en hoe dit produktiewe strategiese verhoudings met die media kan bou. Die laaste afdeling van die proefskrif bestudeer die proses waarvolgens die publiek hul inflasieverwagtinge formuleer deur gebruik te maak van epidemiologiese modelle wat die verspreiding van inflasie verwagtinge, asook die spoed waarteen die publiek oor die algemeen hul inflasieverwagtinge opdateer, beskryf. Die snelheid waarmee die publiek hul verwagtinge opdateer behoort veral van waarde te wees vir toekomstige studies wat poog om ‘n Phillips kurwe met ‘n nuwe aanslag vir Suid Afrika te skort. ‘n Goed geformuleerde Phillips kurwe sal monitering van monetêre beleide se impak verbeter, en sal ook as ‘n goeie riglyn vir toekomstige beleidsontwerp en -implimentering dien.

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.

The volatility transmission in financial markets has important implications for investment decision making, portfolio diversification and overall macroeconomic stability. This paper analyses volatility transmission across four South African financial markets that is the stock, bond, money and foreign exchange markets, using daily data for the period 2000-2010. It also shows whether the volatilities in the SA financial markets present a different behaviour in bull and bear market phases. The effects of the international markets volatility to the local markets volatility was also looked at in this study. To obtain estimates of market volatility, the study experimented with various volatility models that include the GARCH, EGARCH and TARCH. To examine volatility interaction and the transmission of volatility shocks, a VAR model was estimated together with block exogeneity, impulse response and variance decomposition. The study found that there is limited volatility transmission across the SA financial markets. The study also found that the money market is the most exogenous of all markets since the other three financial markets volatility is insignificant to the money market (see impulse response results). For the bond market, volatility transmission was characterized with a decreasing trend. With regard to international markets volatility, it concluded that, the shocks in the international markets will eventually affect the movement in the local markets. The results also highlighted that, world and local markets are important in accelerating the volatility transmission in SA financial markets depending on whether they are in their bull or bear phases. In the case of South Africa, the study found that volatility transmission across markets is higher during bear market periods than bull market periods. Basing on the study results which show that the volatility transmission is limited across SA financial markets, the implication to local and international investors is that there is a greater potential for diversifying risk by investing in different South African financial markets.

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

Thesis (LL.M.)

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 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.