Should Monetary Policy in South Africa Lean against the Wind by Targeting the Financial Cycle?

Malibongwe Cyprian Nyati ()
Additional contact information
Malibongwe Cyprian Nyati: Faculty of Economics and Finance, Tshwane University of Technology, Ga-Rankuwa 0183, South Africa

Economies, 2024, vol. 12, issue 6, 1-20

Abstract: Recently, several studies have argued about the interactions of the real economy and financial system, as well as the importance of financial cycles in business cycle fluctuations. To date, there exists near consensus among central bankers, economists, and other scholars that the financial cycle is an important source of business cycle fluctuations. This has raised the question of whether monetary policy should respond to financial instability and/or imbalances. As a result, we asked the following questions: Should monetary policy lean against the wind by targeting the aggregate financial cycle in South Africa? And what is the role of monetary policy in minimizing financial imbalances and instabilities in South Africa? The present article aims to provide answers to the above-mentioned question. Through the adoption of a multiple-equation generalized method of moments and structural vector autoregressive approaches, this article simultaneously estimates and compares both the finance-augmented and the conventional Taylor rules. It is shown that the South African Reserve Bank has considered developments in the aggregate financial cycle in setting its policy rate. Overall, there is clear evidence to conclude that the South African Reserve Bank can lean against the wind by targeting the aggregate financial cycle, but only as a genuine augmentation not as a fully flagged objective. This article adds new evidence to the South African literature on the prevailing debate of whether monetary policy should respond to developments in the financial system.

Keywords: financial cycle index; monetary policy; business cycle; finance-augmented Taylor rule; structural vector autoregressive modelling; multiple-equation GMM (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7099/12/6/145/pdf (application/pdf)
https://www.mdpi.com/2227-7099/12/6/145/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jecomi:v:12:y:2024:i:6:p:145-:d:1412576

Access Statistics for this article

Economies is currently edited by Ms. Hongyan Zhang

More articles in Economies from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().