The optimal monetary and macroprudential policies for the South African economy

Guangling Liu () and Thabang Molise ()
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Guangling Liu: University of Stellenbosch
Thabang Molise: University of Stellenbosch

No 121, ERSA Working Paper Series from Economic Research Southern Africa

Abstract: We investigate the optimal design and effectiveness of monetary and macroprudential policies in promoting macroeconomic (price) and financial stability for the South African economy. We develop a New Keynesian dynamic stochastic general equilibrium model featuring a housing market, a banking sector and the role of macroprudential and monetary policies. Based on the parameter estimates from the estimation, we conduct an optimal rule analysis and an efficient policy frontier analysis, and compare the dynamics of the model under different policy regimes. We find that a policy regime that combines a standard monetary policy rule and a macroprudential policy rule delivers a more stable economic system with price and financial stability. A policy regime that combines an augmented monetary policy (policy rate reacts to financial conditions) with macroprudential policy is better at attenuating the effects of financial shocks, but at a much higher cost of price instability. Our findings suggest that monetary policy should focus solely on its primary objective of price stability and let macroprudential policy facilitate financial stability on its own.

Keywords: Monetary policy; Macroprudential Policy; Financial stability; Capital requirement; Financial shock; DSGE model (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 E61 (search for similar items in EconPapers)
Date: 2024-10
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Published in ERSA Working Paper Series, October 2024

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Persistent link: https://EconPapers.repec.org/RePEc:rza:ersawp:121

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