Monetary-fiscal coordination in South Africa: Aligning the stars

Hylton Hollander () and Roy Havemann ()
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Hylton Hollander: University of Cape Town
Roy Havemann: Stellenbosch University
Authors registered in the RePEc Author Service: Arnold Zellner

No 264, ERSA Working Paper Series from Economic Research Southern Africa

Abstract: Monetary-fiscal policy tensions build-up when debt is rising and inflation is falling. The consequence is that either fiscal policy must achieve fiscal consolidation with monetary policy maintaining price stability (passive FP-active MP) or monetary policy must accommodate fiscal policy in debt stabilisation leaving fiscal policy free to achieve its spending and redistribution objectives (passive MP-active FP). We introduce the concept of a fiscal neutral rate (fiscal r-star) into a two-agent new Keynesian dynamic stochastic general equilibrium model estimated with South African data. We show two persistent gaps: (i) monetary r-star exceeds fiscal r-star, indicating a misalignment between monetary and fiscal policy; and (ii) market interest rates exceed fiscal r-star, implying that, without policy action, the risk premium on borrowing will continue to be a drag on growth and debt service costs are likely to crowd out other spending. Our model simulations show that the optimal welfare outcomes are achieved by taking steps to align fiscal r-star with monetary r-star, through introducing a credible fiscal anchor.

Keywords: policy coordination; DSGE; monetary-fiscal gap; fiscal r-star; monetary r-star; neutral rate; natural rate (search for similar items in EconPapers)
JEL-codes: E52 E63 O23 (search for similar items in EconPapers)
Date: 2026-02
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Published in ERSA Working Paper Series, February 2026

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