Monetary Policy and Long-Term Interest Rates in South Africa

This paper examines how the short-term and long-term interest rates react to supply, demand and monetary policy shocks in South Africa. Use is made of the impulse response functions obtained from the structural vector autoregressive model with long-term restrictions. We find a positive correlation between the two interest rates after a monetary and demand shock and a negative correlation after a supply shock. The finding of this paper signifies that the operation of the monetary transmission mechanism should be effective in South Africa. Furthermore, the finding of this paper provide an approach to identify supply shocks in the South African business cycle.

National Saving and Fiscal Policy in South Africa: an Empirical Analysis Sector in South Africa

Concerns have been raised in regards to how to redress a decreasing trend in national saving in South Africa. A number of authors have suggested that redressing government saving, through fiscal discipline characterised by a low government budget deficit ratio, should be a key in redressing the national saving trend in South Africa. In order to assess this hypothesis, this paper studies the dynamics of gross national saving, government saving and private saving in response to fiscal shocks, by using the impulse response functions (IRF) obtained from the structural vector autoregressive (SVAR). The paper constructs a structural model, contrary to the reduced-form models used in a number of studies, to assess the response of savings to fiscal shocks. The aim of this paper is twofold: while determining the extent to which fiscal policy influences savings in South Africa, the paper also offers to test whether the Ricardian Equivalence proposition holds in South Africa. The paper concludes that the full Ricardian Equivalence does not hold in the short term and in the long term the response of national saving to fiscal policy shocks is neutral.

Forward Exchange Rate Puzzle: Joining the Missing Pieces in the Rand-US Dollar Exchange Market

The Unbiased Forward Rate Hypothesis (UFRH) stipulates that the forward rates should be a perfect predictor for the future spot rates. A number of studies have tested the UFRH and foreign market efficiency and concluded that the hypothesis does not hold. This phenomenon is known as the UFRH puzzle. A number of studies that reject the UFRH have made use of ordinary least square (OLS) methods and support a linear adjustment between spot and forward exchange rates. This paper establishes that the use of a linear model in testing the UFRH can lead to a misspecification problem if indeed there is a nonlinear adjustment between the forward and spot exchange rates. In order to overcome the problem of model misspecification, this paper applies the nonlinear method of the class of the Smooth Transition Regression (STR) model in assessing the relationship between the Rand-US Dollar future spot and forward exchange rates. With the aid of a series of diagnostic tests, the paper shows that there is indeed a nonlinear adjustment process between the Rand-US Dollar spot and forward exchange rates and that there exists a regime in the STR model where the UFRH eventually holds. Furthermore, the out-of-sample forecast results show that the STR forecasting method outperforms the OLS and random walk methods in forecasting the future spot exchange rate.

South Africa’s Growth Paradox

South Africa has achieved a lot since 1994, when ANC-led government took office. The Performance of the economy since 1994, as measured by the growth rate, has been encouraging with an average growth rate of approximately 2.8% per annum. The inflation rate has been recently under control at between 3% and 6% per annum, the inflation target set by the South African Reserve Bank (SARB). Despite this success problems of unemployment and poverty are still very much with us and have not yet begun to diminish unambiguously. Poverty is around 45% to 50% while broad unemployment rate is somewhere around 26% to 40%. This paper attempts to reexamine the debate on whether SA is experiencing jobless or job creating growth in the context of Okun’s law. Making use of the Structural Vector Autoregressive (SVAR) technique to characterize the dynamics of employment in response to output shocks, this study concludes that while an increase in output increases total employment in general; nevertheless there are some sectors (such as primary and secondary sectors) where the impact of output shocks has been negligible.

Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa

This paper attempts to assess the extent of volatility spillovers between the equity market and the foreign exchange market in South Africa. The multi-step family of GARCH models are used for this end, whereby volatility shocks obtained from the mean equation estimation in each market are included in the conditional volatility of the other market, respectively. The appropriate volatility models for each market are selected, following criteria such as covariance stationarity, persistence in variance and leverage effects. The finding indicates that there is a unidirectional relationship in terms of volatility spillovers, from the equity market to the foreign exchange market. The paper supports the view that the extent of foreign participation in the South African equity market contributes to this pattern of volatility spillover.equity market, foreign exchange market, spillover, GARCH models

Quantum astrometric observables II: time delay in linearized quantum gravity

A clock synchronization thought experiment is modeled by a diffeomorphism invariant "time delay" observable. In a sense, this observable probes the causal structure of the ambient Lorentzian spacetime. Thus, upon quantization, it is sensitive to the long expected smearing of the light cone by vacuum fluctuations in quantum gravity. After perturbative linearization, its mean and variance are computed in the Minkowski Fock vacuum of linearized gravity. The na\"ive divergence of the variance is meaningfully regularized by a length scale $\mu$, the physical detector resolution. This is the first time vacuum fluctuations have been fully taken into account in a similar calculation. Despite some drawbacks this calculation provides a useful template for the study of a large class of similar observables in quantum gravity. Due to their large volume, intermediate calculations were performed using computer algebra software. The resulting variance scales like $(s \ell_p/\mu)^2$, where $\ell_p$ is the Planck length and $s$ is the distance scale separating the ("lab" and "probe") clocks. Additionally, the variance depends on the relative velocity of the lab and the probe, diverging for low velocities. This puzzling behavior may be due to an oversimplified detector resolution model or a neglected second order term in the time delay.Comment: 30 pages, 8 figures, revtex4-1; v3: minor updates and corrections, close to published versio