Monetary policy and heterogeneous inflation expectations in South Africa

This paper examines the relationship between inflation and inflation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate inflation expectations of individual agents as the weighted average of lagged inflation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged inflation and the opposite is true for analysts. The results reveal that the SARB has successfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to accommodate private agents' expectations

Business cycle co-movement between Africa and advanced economies : 1980‒2011

The decoupling hypothesis has attracted growing research interest since the Global Financial Crisis (GFC). However, there is a lack of evidence on patterns of business cycle co-movement for Africa specifically. This paper fills the gap in the literature by analysing business cycle co-movement between African economies and Advanced Economies (AEs) using annual data which cover the period 1980 to 2011. Although the sample does not allow for a close-up investigation of the crisis years in particular, it does provide an overview of the period before, during and immediately after the GFC. In terms of methodology, a Dynamic Factor Model (DFM) was applied, which includes African and Group of Seven (G7) countries. The empirical analysis divides the African countries into four groups, namely low-income countries, middle-income countries, oil-exporting countries and fragile states. The results show evidence of strong co-movement between, on the one hand, the middle-income African countries and the G7, and, on the other hand, the middle-income African countries themselves. The results identify trade linkage as the key driving force behind the co-movement of the business cycle. However, the oil-exporting and low-income African countries exhibit a low co-movement of the business cycle after controlling for common effects from the G7 countries. Interestingly, after the GFC, they decouple from the AEs. Finally, the results do not show signs of co-movement with fragile states.http://www.journals.co.za/ej/ejour_bersee.htmlam2018Economic

THE EFFECT OF DEFENSE SPENDING ON US OUTPUT: A FACTOR AUGMENTED VECTOR AUTOREGRESSION (FAVAR) APPROACH

Empirical evidence on the effect of defense spending on US output is at best mixed. Against this backdrop, this paper assesses the impact of a positive defense spending shock on the growth rate of real GNP using a Factor Augmented Vector Autoregressive (FAVAR) model estimated with 116 variables spanning the quarterly period of 1976:01 to 2005:02. Overall, the results show that a positive shock to the growth rate of the real defense spending translates to a positive short-run effect on the growth rate of real GNP lasting up to ten quarters, but the effect is significant only for two quarters. Beyond the tenth quarter, the effect becomes negative and shows signs of slow reversal at around the 17th quarter. Our results tend to indicate that the mixed empirical evidence, based on small-scale Vector Autoregressive (VAR) and Vector Error Correction (VEC) models, could be a result of a small information set not capturing the true theoretical relationships between the two variables of interest.Defense spending, Output, FAVAR,