Fiscal Policy Uncertainty and Economic Activity in South Africa

Kevin Kotze

No 2017-02, School of Economics Macroeconomic Discussion Paper Series from School of Economics, University of Cape Town

Abstract: This paper considers the effect of fiscal volatility shocks on key macroeconomic variables. The identification of these shocks is derived from a stochastic volatility model that is applied to policy rules for each fiscal instrument. Thereafter, a vector autoregressive model makes use of these measures in a reduced-form setting to consider the effect of an aggregate fiscal volatility shock on economic output, consumption, investment, prices and interest rates. The final part of the analysis involves the construction of a dynamic stochastic general equilibrium model that may be used to investigate the effects of an unexpected increase in the volatility of each fiscal instrument. The results suggest that fiscal volatility shocks produce prolonged contractions in economic output, consumption and investment. In addition, the labour market is also negatively affected, while gross markups and inflation increase. Hence, it is suggested that fiscal volatility shocks have had an important adverse effect on economic activity in South Africa.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-mac
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