Exploring the Nature and Dynamics of Monetary–Fiscal Policy Interactions in South Africa

Amanda Mavundla (), Simiso Msomi and Malibongwe Cyprian Nyati
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Amanda Mavundla: School of Accounting, Economics and Finance, College of Law and Management Studies, University of KwaZulu Natal, Durban 3629, South Africa
Simiso Msomi: School of Accounting, Economics and Finance, College of Law and Management Studies, University of KwaZulu Natal, Durban 3629, South Africa
Malibongwe Cyprian Nyati: School of Accounting, Economics and Finance, College of Law and Management Studies, University of KwaZulu Natal, Durban 3629, South Africa

Risks, 2025, vol. 13, issue 10, 1-19

Abstract: Understanding the nature of monetary and fiscal policy interactions has gained more importance over the years, especially within the context of the global financial crisis and the recent COVID-19 pandemic. This study uses a Time-Varying Parameter Vector Autoregressive (TVP-VAR) model and a Markov Switching Dynamic Regression (MSDR) framework to explore the dynamics of monetary–fiscal policy interactions in South Africa. The analysis employs time series data from 1994 to 2023 and tests the dynamic response of key macroeconomic variables to positive monetary and fiscal policy shocks. Furthermore, the MSDR framework is utilised to analyse how policy behaviour evolves during regime change. The TVP-VAR results show that fiscal expansions led to a positive response in GDP over time, a stable interest rate reaction post-COVID-19, and a consistently negative CPI response, contradicting conventional theory. The MSDR analysis reveals a dominant regime where monetary policy is active and fiscal policy is passive, with a positive interaction between interest rates and government spending, likely reflecting South Africa’s high debt environment. These findings underscore the importance of understanding policy interactions’ landscape to inform policy decisions better and minimise sub-optimal policy outcomes.

Keywords: macroeconomic stability; monetary policy; fiscal policy; policy interactions; TVP-VAR; MSDR (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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