Abstract
This chapter examined the extent to which the volatility in the differential between the South African repo rate and the US Fed Federal funds (FFR) rate matters for the exchange rate and the economic activity. Evidence shows that positive monetary policy volatility shocks depress economic output. Moreover, the effects of the positive exchange rate volatility shocks on economic growth are accentuated when monetary policy volatility is included in the model. This suggests that a synchronised occurrence of the exchange rate and monetary policy volatilities is bad for output growth. The policy implication is that in the immediate aftermath of elevated exchange rate volatility, monetary policy stability is likely to be particularly effective in mitigating the adverse economic effects.
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Notes
- 1.
Symmetry of the series with respect to its mean.
- 2.
Kurtosis is generally compared to that of the normal distribution, which is equal to three.
- 3.
We tested for arch effect and found the arch effects.
- 4.
\( S_{t} = c + \beta \left( {i_{t}^{{\text{SA}}} - i_{t}^{{\text{US}}} } \right) - \delta \left( {y_{t}^{{\text{SA}}} - y_{t}^{{\text{US}}} } \right) + \theta \left( {m_{t}^{{\text{SA}}} - m_{t}^{{\text{US}}} } \right) \) and \( S_{t - 1} = c + \beta \left( {i_{t - 1}^{SA} - i_{t - 1}^{US} } \right) - \delta \left( {y_{t - 1}^{SA} - y_{t - 1}^{US} } \right) + \theta \left( {m_{t - 1}^{SA} - m_{t - 1}^{US} } \right) \) This model suggests that the rand per US dollar exchange rate \( S_{t} \) is determined by relative output differential \( \left( {y_{t}^{{\text{SA}}} - y_{t}^{{\text{US}}} } \right) \) relative money supply \( \left( m_{t}^{\text{SA}} - m_{t}^{\text{US}} \right) \) and relative interest rate differential \( \left( {i_{t}^{{\text{SA}}} - i_{t}^{{\text{US}}} } \right) \).
- 5.
We tested whether placing monetary policy volatility before exchange rate shocks impact our results. We did not find any difference. We estimated the VAR using two lags, and the results were robust to three lags. We included the dummies for inflation targeting and recession in 2009.
- 6.
The identified channel through which policy volatility impacts the real economy is a slowdown in hiring and investment by firms ultimately leading to a drop in real activity, see Bloom (2009) amongst others.
- 7.
Fernández-Villaverde et al. (2011) find that an increase in real interest rate volatility triggers a fall in output.
- 8.
Given the Phillips curve generates positive relationship between movements in inflation and output, both variables should fall when nominal rates decrease. Thus, an increase in monetary policy uncertainty causes nominal interest rate, inflation and output growth to fall.
References
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Ndou, E., Gumata, N., Ncube, M. (2017). Monetary Policy and Exchange Rate Volatilities : Implications for Output Dynamics. In: Global Economic Uncertainties and Exchange Rate Shocks. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-62280-4_16
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DOI: https://doi.org/10.1007/978-3-319-62280-4_16
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