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The South African Economic Response to Monetary Policy Uncertainty

Mehmet Balcilar, Rangan Gupta and Charl Jooste

No 201551, Working Papers from University of Pretoria, Department of Economics

Abstract: We study the evolution of monetary policy uncertainty and its impact on the South African economy. We show that volatility is high and constant using a stochastic volatility model in a sign-restricted VAR setup. Stochastic volatility is model driven and there is an endogenous economic response to uncertainty. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. We study the transmission mechanism of uncertainty for South Africa using a nonlinear DSGE model. The model is calibrated based on the existing literature while the persistence and size of uncertainty is taken from the empirical VAR. The DSGE model shows that the size of the uncertainty shock matters - high uncertainty can lead to a severe contraction in output, inflation and interest rates.

Keywords: Uncertainty; nonlinear DSGE; stochastic volatility (search for similar items in EconPapers)
JEL-codes: C10 E52 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2015-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
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Journal Article: South Africa’s economic response to monetary policy uncertainty (2017) Downloads
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