Econometric Analysis of South Africa’s Fiscal and Monetary Policy Effects on Economic Growth from 1980 to 2022

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

Economies, 2024, vol. 12, issue 9, 1-24

Abstract: This study examined South Africa’s economic growth rate from 1980 to 2022 through an econometric analysis of fiscal and monetary policies. The study sought to investigate the relationships between the economy’s growth rate and various fiscal and monetary policy variables, taking into account different economic approaches such as Keynesian, monetarist, and Wagner’s perspectives. The methodology used consisted of data preparation, multiple unit root tests, Autoregressive Distributed Lag (ARDL) cointegration analysis, diagnostic tests, and pairwise Granger causality analysis. The empirical analysis found a long-term cointegration among the economic growth rate, government debt, expenditure, and revenue in fiscal policy, though government debt and expenditure were not statistically significant. Contrary to economic theory, increased government revenue had a negative correlation with economic growth. There was no long-term relationship found between the economic growth rate and monetary policy variables such as the official exchange rate, inflation rate, real interest rates, and M3 money supply. Pairwise Granger causality tests revealed a one-way relationship between government spending and economic growth, providing support to the Keynesian approach to fiscal policy. This study also discovered evidence that economic growth Granger-causes inflation, implying that economic growth may have predictive power for inflation, consistent with the demand-pull inflation hypothesis. However, no direct predictive relationships were found between the selected monetary policy variables and economic growth, supporting the long-run theory of monetary neutrality. This study suggests evaluating spending, managing inflation, implementing reforms, closing infrastructure gaps, encouraging investment, and ensuring fiscal sustainability.

Keywords: economic growth; fiscal policy; monetary policy; ARDL model; pairwise Granger causality test (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecomi:v:12:y:2024:i:9:p:227-:d:1464539

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