South Africa's real business cycles: The cycle is the trend
Stellenbosch Working Paper Series No. WP12/2016Publication date: 2016
Author(s):
[protected email address] (Department of Economics, Tshwane University of Technology)
This paper tests the `cycle is the trend' hypothesis. We investigate how far permanent and transitory productivity shocks can account for the dynamics observed in the South African business cycle over the period 1946--2014. By estimating a standard small open economy real business cycle model and its financial frictions augmented counterpart, we show that permanent productivity shocks are more important than transitory ones in explaining this country's business cycle fluctuations. This finding supports the `cycle is the trend' hypothesis in the South African business cycle. The model with financial frictions successfully mimics the downward-sloping high autocorrelation of trade balance to output ratio observed in the data, whereas the benchmark model produces a flat autocorrelation function. Financial frictions such as country risk premium shocks help to explain the fluctuations in investment and in the trade balance to output ratio.
JEL Classification:E13, E32, F41, F44
Keywords:Small open economy, real business cycle, permanent shock, transitory shock, financial frictions, Bayesian
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Upcoming Seminars
Monday 21 July 202512:00-13:00
Izak Odendaal: Old Mutual Wealth Chief Investment Strategist
Topic: "Diverging fiscal policies and what it means for markets"
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27 Jun 2025 Another setback for the GNU, but oil markets breathe a little easierThis week was marked by heightened tensions both domestically and internationally. At home, friction intensified between the two largest parties in the Government of National Unity (GNU), the ANC and the DA, following the firing of one of the DA's deputy ministers. Internationally, the US conducted airstrikes on three Iranian nuclear facilities using...
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