Comparative Analysis of VAR and SVAR Models in Assessing Oil Price Shocks and Exchange Rate Transmission to Consumer Prices in South Africa

Luyanda Majenge (), Sakhile Mpungose and Simiso Msomi
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Luyanda Majenge: School of Accounting, Economics & Finance, College of Law & Management Studies, University of KwaZulu-Natal, Durban 3629, South Africa
Sakhile Mpungose: School of Accounting, Economics & Finance, College of Law & Management Studies, University of KwaZulu-Natal, Durban 3629, South Africa
Simiso Msomi: School of Accounting, Economics & Finance, College of Law & Management Studies, University of KwaZulu-Natal, Durban 3629, South Africa

Econometrics, 2025, vol. 13, issue 1, 1-36

Abstract: This study compared standard VAR, SVAR with short-run restrictions, and SVAR with long-run restrictions to investigate the effects of oil price shocks and the foreign exchange rate (ZAR/USD) on consumer prices in South Africa after the 2008 financial crisis. The standard VAR model revealed that consumer prices responded positively to oil price shocks in the short term, whereas the foreign exchange rate (ZAR/USD) revealed a fluctuating currency over time. That is, the South African rand (ZAR) initially appreciated against the US dollar (USD) in response to oil price shocks (periods 1:7), followed by a depreciation in periods 8:12. Imposing short-run restrictions on the SVAR model revealed that the foreign exchange rate (ZAR/USD) reacted to oil price shocks in a manner similar to the VAR model, with ZAR appreciating during the initial periods (1:7) and subsequently depreciating in the later periods (8:12). Consumer prices responded positively to oil price shocks, causing consumer prices to increase in the short run, which is consistent with the VAR findings. However, imposing long-run restrictions on our SVAR model yielded results that contrasted with those obtained under short-run restrictions and the standard VAR model. That is, oil price shocks had long-lasting effects on the foreign exchange rate, resulting in the depreciation of ZAR relative to USD over time. Additionally, oil price shocks reduced consumer prices, resulting in a deflationary effect in the long run. This study concluded that South Africa’s position as a net oil importer with a floating exchange rate renders the country vulnerable to short-term external shocks. Nonetheless, in the long term, the results indicated that the economy tends to adapt to oil price shocks over time.

Keywords: VAR; SVAR; oil price shocks; exchange rate; consumer prices; inflation; South Africa; post-financial crisis; monetary policy (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2025
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