Browsing by Author "Dlamini, Lenhle Precious."

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Financial stability and monetary policy in South Africa.
(2020) Dlamini, Lenhle Precious.; Ngalawa, Harold Phellix Emmanuel.
This thesis is presented in three distinct but related essays. The first essay (Chapter four) explores how financial stress interacts with monetary policy. Financial stress was measured using a time-varying financial conditions index constructed by Kabundi and Mbelu (2017) for South Africa employing thirty-nine monthly financial market variables and macroeconomic variables. The study employed a Markov Switching Vector Autoregression (MSVAR) model estimated with Bayesian methods to investigate this dynamic relationship. The findings reveal that interest rates respond negatively to a high financial stress shock, leading to an increase in credit growth. Despite the expansion of credit, real GDP growth increases marginally and then gradually declines. Given the complementary objectives of financial stability and monetary policy, it is concluded that monetary policymakers need to consider financial stability. Furthermore, the impact of monetary policy is not restricted to adjustments in interest rates; it affects other factors such as lending risk functions. The second essay (Chapter five) examines the interaction of housing-related macro-prudential policies and monetary policy. The study uses housing cycles in a Dynamic Stochastic General Equilibrium (DSGE) model with a small, open economy framework. We estimate the model with Bayesian techniques using South African data covering the period 2000Q1 to 2018Q4. The results indicate that monetary policy has negligible effects on house prices. We consider a loan-to-value (LTV) tool for macro-prudential policy. The results show that a one per cent rise in the LTV ratio, a tight macro-prudential policy, leads to increasing house prices, with significant effects on Consumer Price Index (CPI) inflation. The effects on CPI inflation suggest that monetary policy is not very effective. Efficient policy frontier analysis indicates that the introduction of macro-prudential policy yields an improved, effective outcome that lowers output and inflation volatility. The findings suggest that there is a need for coordination of monetary policy and macro-prudential policy. The third essay (Chapter six) investigates monetary policy and the role of countercyclical bank capital regulation in fostering macroeconomic and financial stability. We employ a DSGE model with a borrowing cost channel and endogenous financial frictions driven by bank losses, bank capital costs and credit risk. The study finds that a policy regime that combines an optimal Taylor rule and macro-prudential policies shows a clear trade-off between price and macroeconomic stability. The results emphasise the significance of the Basel III Accord in mitigating the output-inflation variability faced by the policy authorities, and questions the simultaneous deployment of an optimal Taylor rule.
Monetary policy and asymmetric effects of oil price shocks in South Africa.
(2015) Dlamini, Lenhle Precious.; Ngalawa, Harold Phellix Emmanuel.
This study employs the Structural Vector Autoregressive (SVAR) model to examine the asymmetric effects of oil price shocks on monetary policy in South Africa using monthly data from 1994:1 to 2013:12. A seven variable SVAR with short-run restrictions on the contemporaneous relationships among the variables is constructed for the analysis. Consistent with the existing theory and empirical literature, the study finds that the response of output and inflation to an oil price shock is asymmetric. The nature of the asymmetry, however, is different to what has been reported in most empirical studies. This study finds that a negative oil price shock tends to stimulate output while a positive oil price shock has an insignificant effect on output. Similarly, it is observed that a negative oil price shock reduces inflation by a larger margin than a positive oil price shock increases the general price level. The study results also show that the response of interest rates, money supply, exchange rates, real output and inflation to shocks in the system may be larger or smaller depending on whether oil prices are increasing or decreasing. This underscores that the variables in the monetary policy transmission process respond to shocks asymmetrically. Further investigation reveals that the monetary policy response to increasing and decreasing oil prices is a highly likely source of the asymmetric relationships. It is observed that when crude oil prices are increasing, monetary authorities respond with greater speed and adjust interest rates by larger margins than when crude oil prices are decreasing, which probably explains why increasing crude oil prices tend to have a smaller impact on inflation than decreasing oil prices. It is further observed in the study that exchange rate variations account for a very large proportion of the fluctuations in inflation rates. It is also found that money supply accounts for a larger proportion of the fluctuations in real Gross Domestic Product (GDP) than exchange rates, indicating that money supply may be a more important intermediate target of monetary policy than exchange rates in the transmission of monetary policy where the policy goal is real GDP. In addition, it is found that the proportion of fluctuations in money supply explained by interest rates variations is larger than the proportion explained by exchange rates; and the impact of the interest rates on money supply is also observed to be larger when oil prices are decreasing than when they are increasing. We, therefore, conclude that that the money effect, interest rate and exchange rate are important channels of monetary transmission in South Africa. The study results further reveal that in South Africa, the contribution of the monetary policy goals (inflation and real GDP) to variations in money supply (an intermediate target of monetary policy) may be higher or lower depending on whether crude oil prices are increasing or decreasing. Fluctuations in the rate of inflation account for a higher proportion of the variations in money supply when oil prices are decreasing than when they are increasing; while real GDP fluctuations account for a higher proportion of the variations in money supply when crude oil prices are increasing than when they are decreasing. Similarly, it is observed that exchange rates respond asymmetrically to monetary policy in the event of an increase or a decrease in crude oil prices. The study also reveals that the largest proportion of the fluctuations in interest rates is explained by exchange rates, indicating that monetary authorities respond to exchange rate fluctuations by adjusting interest rates. The impact of this response is observed in money supply variations, as argued in the foregoing discussion. This shows that the monetary policy asymmetry observed in the operating tools and the goals of monetary policy can also be traced through the intermediate targets.