The spillover effects of the US monetary policy on the South African economy.

Abstract

The monetary policy actions of the United States have been identified to have a major spillover globally. Three channels explain this spillover effect: the trade flows, the exchange rate and the financial channel. This study to examines how South Africa is impacted by the United States economic development. This spillover may be asymmetrical. Indeed, periods of low and high volatility may have different impacts. Thus, we examine the spillover from the United States to South Africa using a Bayesian regime switching structural vector autoregressive model. We use quarterly data from 1994Q1 to 2023Q1. The impulse response functions indicate that U.S. monetary tightening—reflected by an increase in the Federal Funds Rate—negatively affects the South African economy. Specifically, capital outflows triggered by higher U.S. interest rates result in a depreciation of the South African rand and a decline in real GDP. However, there is a rise in stock prices due to the possibility of capital outflows and domestic bonds becoming less attractive. In response, the South African Reserve Bank increases the repurchase rate to maintain price stability amid inflationary pressures and to halt capital outflows. The results indicate that the impact of the shocks on the domestic variables are heightened during periods of high volatility. Therefore, the empirical results support a substantial spillover from the United States economic developments and asymmetric effects that depend on the volatility regime.