This is an initiative by the South African Modelling Network (SAMNet) aimed at collecting and sharing the codes of DSGE models focusing on the South African economy.
SAMNet is part of Economic Research Southern Africa (ERSA)
In this ReadMe file, we provide a summary of each paper and a link to access each one of them when available
A work in progress...
All suggestions welcome
- Will the SARB always Succeed in Fighting Inflation with Contractionary Policy?
- Journal: South African Journal of Economics
- Abstract: The conventional view is that a monetary policy shock has both supply-side and demand-side effects, at least in the short run. Barth and Ramey show that the supply-side effect of a monetary policy shock may be greater than the demand-side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation. We estimate a standard New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy for the South African economy to show that whether the South African Reserve Bank should apply contractionary policy to fight inflation depends critically on the nature of the disturbance. If an increase in expected future inflation is mainly due to supply shocks, the South African Reserve Bank should not apply contractionary policy to fight inflation, as this would lead to a persistent increase in inflation and a greater loss in output. Our estimation results also show that with a moderate level of cost-channel effect and nominal rigidities, a New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy is able to mimic the price puzzle produced by an estimated vector autoregressive model.
- A Medium-Sized Open Economy DSGE Model of South Africa
- Journal: South African Reserve Bank Working Paper Series
- Abstract: In this paper a dynamic stochastic general equilibrium (DSGE) model is specified for the South African economy. Nominal and real frictions help to make the model estimable, and is then estimated on South African and global data using Bayesian techniques. The empirical fit of the model is validated through a forecast comparison with private sector consensus forecasts. The model is found to outperform the inflation forecasts of private sector economists.
- Title: The Equity Price Channel in a New-Keynesian DSGE Model with Financial Frictions and Banking
- Journal: Economic Modelling
- Abstract: This paper studies the role of the equity price channel in business cycle fluctuations, and highlights the equity price channel as a different aspect to general equilibriummodelswith financial frictions and, as a result, emphasizes the systemic influence of financialmarkets on the real economy.We develop a canonical dynamic general equilibrium modelwith a tractable role for the equitymarket in banking, entrepreneur and household economic activities. The model is estimatedwith Bayesian techniques using U.S. data over the sample period 1982Q01–2015Q01.Weshow that a dynamic general equilibrium model with an equity price channel well mimics the U.S. business cycle. The model reproduces the strong procyclicality of the equity price. The equity price channel significantly exacerbates business cycle fluctuations through both financial accelerator and bank capital channels. Our results support the increasing emphasis on common equity capital in Basel III regulations. This is beneficial in terms of financial stability, but amplifies and propagates shocks to the real economy.
- Labour Market and Monetary Policy
- Journal: ERSA Working Papers
- Abstract: This paper investigates the implications of the weak response of wages to market conditions in South Africa on the conduct of monetary policy. We use a DSGE model with unemployment following Blanchard and Gali (2010) to assess how di¤erent types of labour markets impacts monetary policy responses to shocks. The findings mainly suggest that stabilizing inflation may lead to high and persistent fluctuations in unemployment. Furthermore, the sacrifice ratio appears to be the highest when the labour market is characterized by high flows and a high level of steady state unemployment. The estimation results using South African data reveals a picture of a labour market with pervasive wage rigidities and large flows in the labour market, with high levels of job creation and job destruction rates. It is important to highlight that in the South African case, job destruction rates dominate the dynamics.
- Credit Spread Variability in the U.S. Business Cycle: The Great Moderation versus the Great Recession
- Journal: Journal of Banking and Finance
- Abstract: This paper identifies the prevailing financial factors that influence credit spread variability and shows how they affected the U.S. business cycle during the 1990–91 and 2001 recessions of the Great Moderation period (1984–2006) and the Great Recession of 2007–09. To do this, we develop and estimate a dynamic general equilibrium model in which financial intermediation and equity assets play a central role. Over the three recession periods, we find that bank market power (sticky rate adjustments and loan rate markups) played a significant role in the credit spread variability that disrupted the U.S. business cycle. Equity prices exacerbate movements in credit spreads through the financial accelerator channel, but cannot be regarded as one of the main driving forces of credit spread variability. Across the three periods, we observe a remarkable decline in the influence of technology and monetary policy shocks. The influence of loan-to-value ratio shocks declined after the 1990–91 recession, while the bank capital requirement shock exacerbated and prolonged credit spread variability over the 2007–09 recession.
- Housing and Credit Market Shocks: Exploring the Role of Rule-Based Basel III Counter-Cyclical Capital Requirements
- Journal: Economic Modelling
- Abstract: This paper examines the extent to which the Basel III bank capital regulation attenuates fluctuations in housing and credit markets and fosters financial and macroeconomic stability. We use a positive housing demand shock to mimic a housing market boom and a negative financial shock for credit squeeze and economic meltdown. The results show that the rule-based Basel III counter-cyclical capital requirement effectively attenuates fluctuations in housing and credit markets and prevents bubbles. In the case of a negative financial shock, it significantly reduces the magnitude of economic meltdown. Our analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust the capital requirement to changes in credit and output when implementing the counter-cyclical buffer. Future research could extend the study by comparing the effectiveness of the rule-based Basel III with other macroprudential tools in achieving financial and macroeconomic stability.
- The Optimal Monetary and Macroprudential Policies for the South African Economy
- Journal: South African Journal of Economics
- Abstract: We investigate the optimal design and effectiveness of monetary and macroprudential policies in promoting macroeconomic (price) and financial stability for the South African economy. We develop a New Keynesian dynamic stochastic general equilibrium model featuring a housing market, a banking sector and the role of macroprudential and monetary policies. Based on the parameter estimates from the estimation, we conduct an optimal rule analysis and an efficient policy frontier analysis, and compare the dynamics of the model under different policy regimes. We find that a policy regime that combines a standard monetary policy rule and a macroprudential policy rule delivers a more stable economic system with price and financial stability. A policy regime that combines an augmented monetary policy (policy rate reacts to financial conditions) with macroprudential policy is better at attenuating the effects of financial shocks, but at a much higher cost of price instability. Our findings suggest that monetary policy should focus solely on its primary objective of price stability and let macroprudential policy facilitate financial stability on its own.
- A Bank-Level Analysis of Interest Rate Pass-Through in South Africa
- Journal: South African Reserve Bank Working Paper Series
- Abstract: We study how changes in the South African Reserve Bank’s policy rate are passed through to a range of household and corporate lending and deposit interest rates over the period January 2009 to December 2020. We use a suite of asymmetric error correction models that allow for sign asymmetry while controlling for a range of confounding factors, including bank funding spreads, liquidity and credit premia. Our results indicate that interest rate hikes are passed through to mortgage interest rates more strongly than rate cuts in long-run equilibrium but that pass-through to other lending rates is generally complete and symmetric. While pass-through to call deposit interest rates is found to be complete and symmetric, cheque account interest rates are very sticky. A notable implication of our results is that the stimulatory effect of a policy rate cut is blunted, both in terms of the degree to which it reduces debt servicing costs and the degree to which it disincentivises saving. A counterfactual analysis reveals that household mortgage interest rates have fallen by approximately 300 basis points during the COVID-19 pandemic relative to a business-as-usual scenario. This indicates that the South African Reserve Bank’s accommodatory policy has remained effective over the COVID-19 period, despite offsetting increases in risk and liquidity premia that have weakened the transmission of policy easing to the real economy.