Global Growth and Financial Spillovers and the South African Macro-economy

This book offers new quantitative insights into how South African economy reacts to external economic shocks. The analysis includes focusing on economic growth and financial spill over, effects of capital inflows, contrasting the stock market price returns and volatility on economic growth and determining the effects of financial stress. -- Provided by Publisher Cover 1 Half-Title 2 Title 4 Copyright 5 Contents 6 List of Figures 12 List of Tables 18 Preface 19 Acknowledgements 22 1 Introduction 23 1.1 Stylised facts 24 1.1.1 What happens to the exchange rate and asset prices at peak and low levels of global risk aversion? 24 1.2 Do foreign and South African asset prices move together? 26 1.3 The relationship between G7 economic growth and South African growth 27 1.4 Correlation between South African trade variables and G7 economic growth 28 1.5 Are South Africa’s export shares following global economic growth dynamics? 30 Part I Growth Spillover Effects 32 2 Positive Economic Growth Spillovers of G8 Countries into South Africa 33 2.1 Introduction 33 2.2 Recent growth spillovers evidence 37 2.2.1 Evidence on the regional sources of growth spillovers 37 2.2.2 Evidence of various channels of transmission 38 2.3 Brief discussions of various economic linkages 38 2.3.1 Trade patterns 38 2.3.2 Foreign inward and outward investment 41 2.3.3 The real effective exchange rate movements and implications for competitiveness 41 2.4 The methodology 42 2.4.1 The modified Poirson and Weber growth spillover framework 42 2.5 The empirical analysis 43 2.5.1 How does South African economic growth respond to positive GDP shocks from G8 countries? 43 2.5.2 Evolution of South African growth before, during and after the recession in 2009Q1–Q3? 45 2.5.3 The role of different transmission channels 48 2.5.4 To what extent are US growth shocks transmitted via third countries? 50 2.6 Conclusion 51 3 Growth Spillovers from BRIC Countries into South Africa 53 3.1 Introduction 53 3.2 Dissecting the role of China on South African trade dynamics 56 3.2.1 The South African exports to China 57 3.2.2 The South African imports from China 57 3.3 The methodology 58 3.4 The data 59 3.5 Empirical results 60 3.5.1 How did BRIC countries contribute to South African GDP growth during the recession in 2009Q1–Q3 and beyond? 61 3.5.2 The role of different transmission channels 63 3.5.2.1 The counterfactual analysis of various channels and third country effects 64 3.6 Conclusion 68 Appendix A3 68 Ordering sequence 68 Part II Spillovers of Foreign Financial Shocks 69 4 The Spillovers of Financial Shocks from the United States into the South African Economy 70 4.1 Introduction 70 4.1.1 The relationship between US and SA financial variables 71 4.1.2 The relationship between US trade with SA 73 4.2 Recent studies 75 4.3 VAR methodology 76 4.4 The results 78 4.5 Discussion of the results 78 4.5.1 Robustness analysis: does the sample size alter the responses? 79 4.5.2 Historical contributions 81 4.6 Conclusion 82 Appendix A4 84 Appendix B4 85 5 Spillovers from Euro Area Bond Yields into the South African Macro Economy 86 5.1 Introduction 86 5.2 Stylised facts on trade relations between South Africa and the euro area 87 5.3 A brief review of the portfolio balance model of the exchange rate determination 90 5.4 VAR methodology and the data 91 5.5 Findings 93 5.5.1 Responses to an unexpected positive euro area bond yield shock 93 5.6 What are the effects of selected unexpected positive euro area bond yields shocks? 95 5.6.1 Does the inclusion of the period of global uncertainty between 2008 and 2011 affect the results? 95 5.6.2 The counterfactual analysis using extended sample data 96 5.7 Conclusion 98 Appendix A5 99 Part III Capital Flow Effects and the Trade Balance 100 6 Capital Inflows and Asset Prices in South Africa 101 6.1 Introduction 101 6.2 Stylised relationships during the inflation targeting period 102 6.3 Recent studies 106 6.4 VAR methodology 106 6.5 Data 107 6.6 What are the initial responses of variables on impact? 107 6.6.1 Empirical results 107 6.6.2 Counterfactual analysis of the role of shocks from capital inflows 109 6.6.3 Did the capital inflow shock impact imports and exports? 111 6.6.4 The effects of capital inflows shocks on financial vulnerability indicators 113 6.6.5 Capital inflows and credit growth 113 6.6.6 Tobin’s q of residential property and capital inflows 114 6.7 Conclusion 117 Appendix A6 118 7 The Effects of Portfolio Inflow and Outflow on the Economy 119 7.1 Introduction 119 7.2 Do net portfolio flows increase asset prices returns? 121 7.2.1 How do net portfolio inflows impact the exchange rate? 122 7.2.2 Relationship between portfolio flows and economic growth 123 7.3 VAR methodology 123 7.4 Results 124 7.4.1 What are the effects of a positive inflation shock on various capital inflows and outflows? 124 7.4.2 Are outflows or inflows more responsive to an inflationary shock? 125 7.4.3 What are the effects of a contractionary monetary policy shock on capital flows? 125 7.4.4 What are the effects of positive portfolio outflow shocks? 127 7.4.5 What is the impact of positive portfolio inflow and other forms of capital inflow shocks? 128 7.5 Counterfactual analysis of the role of portfolio flows 128 7.5.1 Contributions of portfolio flows and domestic factors on asset prices 129 7.5.2 Portfolio flows versus asset price and domestic factors: counterfactual economic growth analysis 130 7.6 An unexpected positive interest rate differential shock on portfolio flows dynamics 131 7.7 Conclusion 132 Appendix A7 133 8 Investment Flows and Exchange Rate Effects on the Trade Balance 134 8.1 Introduction 134 8.2 Further trend analysis 136 8.3 Theoretical linkages 138 8.4 VAR methodology 139 8.5 Findings 140 8.5.1 Does the evidence change when we add more shocks? 143 8.5.2 Which components of the trade balance transmit the shocks? 144 8.6 The historical and variance decompositions 145 8.7 Conclusion 146 Appendix A8 147 Part IV Equity Markets Interdependence and Financial Stress 148 9 Interdependence in Emerging Economies: The Case of Equity Markets 149 9.1 Introduction 149 9.2 The multivariate VAR–EGARCH model 150 9.2.1 The mean equation 150 9.2.2 The variance equation 150 9.2.3 Covariance relationship 151 9.2.4 Summary of the relationships 151 9.3 Data and descriptive statistics 152 9.4 Results: conditional mean results 152 9.4.1 Asymmetric transmission based on the conditional variance 154 9.4.2 How vulnerable is South Africa’s economic growth to an unexpected positive stock price returns and volatility shocks? 155 9.4.3 Are there any differential effects between stock returns and volatility on economic growth? 157 9.4.4 To what extent do stock price dynamics differ from other shocks? 158 9.4.5 Do stock price returns and volatility transmit portfolio outflow shocks into the economy? 160 9.5 Which shock between stock price volatility and monetary policy tightening impacts economic growth the most? 161 9.5.1 How would economic growth have evolved in the absence of stock returns and volatility? 162 9.6 Conclusion 164 Appendix A9 164 10 Financial Stress, Volatility and Economic Activity in South Africa 166 10.1 Introduction 166 10.2 The construction of the financial stress index 167 10.3 Data and the construction of the FSI for South Africa 170 10.4 The FSI and its effects on economic activity 171 10.4.1 The relationship between financial stress and economic activity 171 10.4.2 Impulse response analysis 172 10.4.3 The propagation role of the financial stress index 172 10.4.4 Effects of financial stresses on monetary policy reaction function 173 10.5 Conclusion 175 Appendix A10 176 11 Conclusion 177 Notes 183 References 187 Index 199 To what extent is South Africa affected by G8 economies and BRIC growth shocks? This book identifies channels that amplify these shock effects, the relevance of third country transmission effects and the effects of the first and second rounds of US quantitative easing. The changing reactions of South African variables over time to financial shocks emanating from the US and selected countries in the Euro area, is presented. The book quantifies the effects of capital flow shocks, determines the counterfactuals of asset prices and economic growth variables, and compares the contribution of capital flows and domestic macro factors on asset prices. The effects of the exchange rate depreciation are contrasted to the decline in investment as key drivers of the trade balance. Stock market interdependence is determined amongst South African, Indian and Brazilian equities. The contributions of stock price returns and volatility on South African economic growth are contrasted. The authors construct a financial stress index for South Africa and determine how it amplifies shocks. Front Matter....Pages i-xxi Introduction....Pages 1-9 Front Matter....Pages 11-11 Positive Economic Growth Spillovers of G8 Countries into South Africa....Pages 13-32 Growth Spillovers from BRIC Countries into South Africa....Pages 33-48 Front Matter....Pages 49-49 The Spillovers of Financial Shocks from the United States into the South African Economy....Pages 51-66 Spillovers from Euro Area Bond Yields into the South African Macro Economy....Pages 67-80 Front Matter....Pages 81-81 Capital Inflows and Asset Prices in South Africa....Pages 83-100 The Effects of Portfolio Inflow and Outflow on the Economy....Pages 101-115 Investment Flows and Exchange Rate Effects on the Trade Balance....Pages 116-129 Front Matter....Pages 131-131 Interdependence in Emerging Economies: The Case of Equity Markets....Pages 133-149 Financial Stress, Volatility and Economic Activity in South Africa....Pages 150-160 Conclusion....Pages 161-166 Back Matter....Pages 167-187