This study empirically investigates the relationship between fiscal deficit, inflation, M3 money supply and the exchange rate in South Africa. The study makes use of quarterly macroeconomic time-series data sets comprising 84 observations, covering the period from 1994Q1 to 2015Q4. The unit root tests conducted employed the Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) tests. The results reveal that the variables become stationary at first difference. The Johansen co-integration technique suggests that there is at least one co-integrating equation among the variables. The results of the Engle-Granger approach, which is residual based, show that the residuals are stationary, thus validating the existence of a long-run relationship between the model variables. The study carried out a Granger causality test. The results indicate that there is a strong Granger causal relationship between the variables (IF) and (FD). Another strong causal relationship emerges between inflation and money supply. The ECM model was employed to identify the speed of adjustment as a response to the departures from the long-run equilibrium path. The estimated coefficient of the ECM error term has the required sign and is statistically significant at the five per cent level of significance. The error term indicates a quick convergence to equilibrium. The study concludes that the dependent variable (FD) is jointly caused by all the independent variables in the long-run. The results of the variance decomposition of the variable (FD) to innovations resulting from IF, MS and RER indicate that own shocks remain the dominant source of total fluctuations in the forecast error of the variables. The findings of the study are efficient and reliable as the estimated model passed all the major diagnostic tests. By implication the findings suggest that the estimated model show high goodness of fit and is thus reliable for policy making. The study recommends a fiscal adjustment that will enhance economic growth. Additionally, a fiscal policy that will aim at identifying and mitigating other possible leakages that narrow the tax base should be considered.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:nmmu/vital:30502 |
| Date | January 2017 |
| Creators | Tala, Lavisa |
| Publisher | Nelson Mandela University, Faculty of Business and Economic Sciences |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis, Masters, MPhil |
| Format | xii, 114 leaves, pdf |
| Rights | Nelson Mandela University |
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