Do High Government Debt Service Costs Reduce the Potency of Accommodative Fiscal Policy in South Africa?

Eliphas Ndou and Nombulelo Gumata
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Nombulelo Gumata: Eldoreigne X3

Chapter Chapter 15 in Fiscal Policy Shocks and Macroeconomic Growth in South Africa, 2023, pp 177-199 from Springer

Abstract: Abstract This chapter explored whether the increase in interest payments dampens the effectiveness of the accommodative fiscal policy shocks. We find that the responsiveness of output growth to the budget deficit and government expenditure growth shocks has systematically weakened over time. Positive interest payment shocks lead to a decline in nominal output growth and government expenditure growth. These results indicate that positive interest payment shocks are some of the leakages that affect the size and sign of fiscal multipliers. The repo rate increases due to positive shocks to the budget deficit. The counterfactual scenarios show that in the absence of the repo rate tightening channel, output growth increases more than the actual response. This means that the repo rate tightening channel dampens the positive shock effects of the budget deficit on output growth, employment growth, and the unemployment rate. The results have implications for the design of fiscal policy interventions aimed at growing the economy and lowering the unemployment rate. The monetary policy stance and the slope of the yield curve matter for the propagation effects of accommodative fiscal policy. The impact of positive interest payment shocks on output growth and government expenditure growth shows the importance of the coordination between monetary policy and fiscal policy, as it affects government financing conditions and the potency of accommodative fiscal policy shocks.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-37755-6_15

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DOI: 10.1007/978-3-031-37755-6_15

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