Evaluating South African Fiscal and Monetary Policy Using a Wavelet-Based Model

Patrick Crowley and David Hudgins

No 2017-08, School of Economics Macroeconomic Discussion Paper Series from School of Economics, University of Cape Town

Abstract: This paper models South African fiscal and monetary policy in an open economy context, using a wavelet-based optimal control model. We then use the model to simulate fiscal and monetary strategies under different levels of policy restrictions. This research applies the Maximal Overlap Discrete Wavelet Transform (MODWT) to post-apartheid South African quarterly GDP data and other pertinent macro data, and then uses these decomposed variables to build a large state-space linear-quadratic tracking model. Using a political targeting design for the frequency range weights, we then simulate jointly optimal fiscal and monetary policy where: (1) both fiscal and monetary policy are dually emphasized, (2) fiscal policy is unrestricted while monetary policy largely restricted, and (3) only monetary policy is relatively active, while fiscal spending is heavily restricted. This paper adds to recent research by incorporating an external sector by using the South African real effective exchange rate as a driver of output.

Date: 2017
New Economics Papers: this item is included in nep-cmp and nep-mon
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