Real Interest Rate Persistence in South Africa: Evidence and Implications

Stellenbosch Working Paper Series No. WP17/2012
 
Publication date: 2012
 
Author(s):
[protected email address] (Council for Scientific and Industrial Research)
[protected email address] (Department of Economics, University of Pretoria)
[protected email address] (Department of Economics, University of Pretoria)
[protected email address] (Department of Economics, University of Stellenbosch)
[protected email address] (Department of Economics, University of Pretoria)
[protected email address] (Department of Economics, University of Pretoria)
 
Abstract:

The real interest rate is a very important variable in the transmission of monetary policy. It features in vast majority of financial and macroeconomic models. Though the theoretical importance of the real interest rate has generated a sizable literature that examines its long-run properties, surprisingly, there does not exist any study that delves into this issue for South Africa. Given this, using quarterly data (1960:Q2-2010:Q4) for South Africa, our paper endeavors to analyze the long-run properties of the ex post real rate (EPRR) by using tests of unit root, cointegration, fractional integration and structural breaks. In addition, we also analyze whether monetary shocks contribute to fluctuations in the real interest rate based on test of structural breaks of the rate of inflation as well as Bayesian change point analysis. Based on the tests conducted, we conclude that the South African EPPR can be best viewed as a very persistent but ultimately mean-reverting process. Also, the persistence in the real interest rate can be tentatively considered as a monetary phenomenon.

 
JEL Classification:

C22, E21, E44, E52, E62, G12

Keywords:

Real Interest Rate, Monetary Policy, Persistence, Mean Reversion

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BER Weekly

13 September 2021
It was a data-heavy week in SA, with the 2021Q2 real GDP data indicating that the economy had better-than-expected recovery momentum in the first half of the year. While growth remained solid in the second quarter, both the survey and actual data released last week revealed the significant impact that the range of shocks at the start of the third quarter...

Read the full issue