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The Impact of Uncertainty Shocks in South Africa: The Role of Financial Regimes

Mehmet Balcilar, Rangan Gupta and Theshne Kisten

No 202046, Working Papers from University of Pretoria, Department of Economics

Abstract: This article examines the connection between economic uncertainty and financial market conditions in South Africa, documenting that the macroeconomic implications of an uncertainty shock differs across financial regimes. A non-linear VAR is estimated where uncertainty is captured by the average volatility of structural shocks in the economy, and the transmission mechanism is characterised by two distinct financial regimes (i.e. financially stressful versus normal periods). We find that while the deterioration of output following an uncertainty shock is much more prominent during normal periods than during stressful periods, it is much more persistent during stressful financial times. The share of output variance explained by the volatility shocks in good financial times is more than double the share in bad times. Uncertainty shocks are found to be inflationary in both regimes, with the impact being larger in the stress regime. While our estimates reveals that financial frictions do not amplify the impact of uncertainty on real output, it does increase the impact on prices.

Keywords: Uncertainty; Financial regimes; South Africa; Non-linear VAR; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 G00 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2020-05
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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