Business cycles, fiscal policy and monetary integration in Southern African Development Community.
Nzimande, Ntokozo Patrick.
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This thesis investigated the selected macro-monetary topics in the Southern African Development Community (SADC). The thesis is presented in three distinct but related essays. The rst essay (Chapter 2) examines the extent to which business cycles are synchronised in the SADC area using a dynamic factor model which separates idiosyncratic shocks from common shocks (regional common shocks). Countries are said to be synchonised if regional common shocks explain a large variance of withincountry business cycles. Conversely, if a large variance of within-country business cycles is accounted for by idiosyncratic shocks then countries are said not to be synchronised. The study results have in-depth rami cations for the proposed SADC monetary union. If business cycles are synchronised, it implies that provided that other conditions for establishing a monetary union are satis ed, the use of a single monetary policy may be optimal. Put di erently, if business cycles are driven by common shocks then the use of a mutual monetary policy is warranted. The results of the study show that the regional common factor is important for some countries, and not for others. More precisely, it was discovered that regional common shocks signi cantly explain most within-country business cycles in Botswana, South Africa, Malawi, Tanzania, Democratic Republic of Congo, Lesotho, and Swaziland, suggesting that a shared monetary policy could be considered among these countries. In addition, the study demonstrated that idiosyncratic shocks play little or no signi cant role in explaining within-country business cycles for most countries considered in the sample. Idiosyncratic factors are found to be signi cant only in Malawi, and Seychelles. The important nding emerging from the study results is that, based only on the business cycles synchronisation condition, a monetary union encompassing all SADC member countries would not be optimal. The second essay (Chapter 3) examines the endogeneity hypothesis in the context of the SADC area. In particular, a Generalised Method of Moments is used to similarity, and exogenous factors on the extent to which SADC member states are synchronised. Panel data covering the period 2000 to 2016 is used to conduct the analysis. The study results show that trade integration positively affects business cycles synchronisation, suggesting that promoting/or stimulating intra-SADC trade could possibly result to intensified business cycles co movement in the bloc. In addition, the study results show that macroeconomic policies' similarity (that is both monetary and fiscal policies) exerts sanguine and statistically significant effect on business cycles synchronisation. It was found that oil price changes have a decoupling effect on regional business cycles. This could be explained by the fact that, in the SADC region, some countries are net oil importers while other are net oil exporters. Thus, the effect of oil movements depends on whether a country is a net importer, or net exporter of oil. While a monetary union entails benefits to member states, it comes at the 'expense' of the independence to alter monetary policy tools in order to deal with country-specific business cycles. Hence, for union members, fiscal policy becomes the only policy recourse available to deal with idiosyncratic macroeconomic disturbances/ or to mitigate conflicts over a preferred monetary policy. Therefore, fiscal policy sustainability is crucial for the functioning of a monetary union. Unsustainable fiscal policies may neither be a mechanism, nor effective tool for dealing with country-specific disturbances, thus threatening the stability of a monetary union. Hence, the third essay (Chapter 4) of this thesis examines the sustainability of fiscal policies in the SADC region using Bohn's (1998) fiscal policy reaction function. In particular, we employ dynamic panel models (that is, panel mean group, mean group, and dynamic fixed effects) to evaluate the response of government revenues to changes in public expenditures. Using data covering the period 1990-2016, the findings of the study reveal that public revenues positively react to changes in government expenditures. Thus, fiscal policies, in the SADC area, are found to be sustainable. However, the reaction coefficients are less than a unity, implying that investigate the role of trade intensity, financial integration, macroeconomic policy fiscal policies are 'weakly' sustainable. Therefore, we argue that SADC governments may face difficulties in marketing their debt in the future.