South Africa's real business cycles: The cycle is the trend

Stellenbosch Working Paper Series No. WP12/2016
 
Publication date: 2016
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
[protected email address] (Department of Economics, Tshwane University of Technology)
 
Abstract:

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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BER Weekly

22 February 2021
As is often the case, domestic financial markets largely ignored local developments, including a lower-than-expected January consumer inflation print, last week and were swept along by the intensification of the global reflation trade. Outside of the inflation release, the domestic data releases continued to show that there was still some recovery momentum...

Read the full issue