Spillovers of the Conventional and Unconventional Monetary Policy from the US to South Africa

Working Paper 818

Abstract

This paper assesses the effect of US monetary policy on South Africa during the period 1990- 2018. We separately analyse and compare the effect of conventional monetary policy, before the Global Financial Crisis, and unconventional monetary policy, after the US monetary policy reached the zero lower bound. Our impulse response function results indicate that monetary policy in South Africa is somewhat independent, responding to local inflation, economic activity and financial conditions. However, the variance decomposition also indicates that the US monetary policy accounts for some variation of the South African policy rate. Finally, we find a sluggish response of industrial production and credit differ post the global financial crisis. We see this as an indication of the effects of structural issues to the real economy, political uncertainty and constrained households’ balance sheet which has prevented the local economy to take advantage of low local interest rates and the global economic recovery after the crisis.