Does financial stability spur or retard output and price stability in South Africa?

Abstract

Following the 2007-2009 global financial crisis, the South African Reserve Bank (SARB) prioritised financial stability. This study assesses the impact of financial stability on South Africa's output and price stability, which is crucial for framing its monetary policy. Utilising a Structural Vector Autoregression (SVAR) approach, the influence of the Financial Conditions Index (FCI) on the Gross Domestic Product (GDP) and Consumer Price Index (CPI) between 1960Q1 and 2022Q4 was analysed. Results revealed a strong connection between these objectives. GDP drops after an FCI disturbance, whereas the CPI trends upwards when the SARB counters financial imbalances. This vital finding indicates a positive relation between enhanced financial conditions and output stabilisation but reveals a trade-off between price and financial stability. After a GDP shock, financial conditions improve, but they deteriorate following a CPI shock. If the SARB reacts by "mopping up" post-crisis, the policy rate typically drops, pointing to potential financial vulnerabilities. Both GDP and CPI react positively to FCI disturbances when SARB is passive. The evidence suggests that while financial stability bolsters output stability, it might endanger price stability. Thus, amongst other recommendations, South Africa's monetary policy authorities must lean against financial imbalances instead of mopping after a crisis

Keywords: {'name': 'price stability'}, {'name': 'output stability'}, {'name': 'financial stability'}, {'name': 'SVARs'}

Authors & affiliations

Khwazi Magubane
Affiliation not supplied

Jacques De Jongh
Affiliation not supplied

Precious Mncayi-Makhanya
Affiliation not supplied

Jabulile Makhalima
Affiliation not supplied

Phindile Maziya
Affiliation not supplied

Boingotlo Wesi
Affiliation not supplied

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