Monetary Policy Shocks and Macroeconomic Fundamentals in South Africa

This South African case study controls for the fiscal side of the economy using government borrowing as a potential accelerator of asymmetry in a monetary function that follows Taylor’s rule. Through the linear and non-linear ARDL framework, we find significant asymmetry effects of monetary policy on output and inflation, respectively. We also find government borrowing as an important underlying source of asymmetries in the response of macroeconomic fundamentals to monetary policy shocks in South Africa. Thus, we recommend that monetary authorities consider not only the effectiveness or otherwise of monetary policy instruments to affect the target policy goals, but also the fact that not all the target variables react in a similar way to expansionary and contractionary monetary policy shocks.