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Monetary Policy Effectiveness in the Face of Uncertainty: The Real Macroeconomic Impact of a Monetary Policy Shock in South Africa during High and Low Uncertainty States

Chevaughn van der Westhuizen (), Renee van Eyden () and Goodness Aye ()
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Chevaughn van der Westhuizen: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa
Renee van Eyden: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa
Goodness Aye: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa

No 202331, Working Papers from University of Pretoria, Department of Economics

Abstract: Economies all over the world operate monetary policy with the main objective to create stable macroeconomic environment for economic prosperity, with monetary policy typically the first line of defence against a number of internal and external shocks. This study addresses whether the effectiveness of monetary policy in South Africa is influenced by the prevailing degree of uncertainty in the domestic goods, stock and currency market as well as the degree of uncertainty in global markets. This is investigated through a Self-Exciting Interacted VAR (SEIVAR) methodology augmented with GARCH and EGARCH volatilities on monthly South African data, over the period 2000:02-2022:05 during which South Africa operated under an inflation targeting regime. Results point to the asymmetric effects of a monetary policy shock dependent on the uncertainty state and that monetary policy was less effective in the high uncertainty states. The results hold important policy implications for the policy makers, as it is imperative to understand how uncertainty alters the transmission of monetary policy through the economy.

Keywords: Financial Markets; Generalized Impulse Response Function; Inflation; Monetary policy shocks; Non-Linear Self-Exciting Interacted Vector Auto-Regressions; Uncertainty (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2023-10
New Economics Papers: this item is included in nep-afr, nep-cba, nep-mac and nep-mon
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