Business Cycles and Structural Change in South Africa (eBook)

Preface 7
Contents 9
Introduction 11
1 Part I: Looking Back 12
2 Part II: The Financial Crisis and Its Impact on the Cycle 12
3 Part III: Key Drivers of the South African Business Cycle 13
4 Part IV: Predicting the South African Business Cycle 15
5 Conclusions 15
References 16
Part I Looking Back 17
What Do We Know About the South African Business Cycle? 18
1 The Concept and Measurement of the Business Cycle 19
2 The South African Business Cycle 22
3 Properties of the South African Business Cycle and Their Relation to Various Identification Methods 26
3.1 Comparing Turning Point Cycle Methodologies for South African Cycles 27
3.2 Stylised Facts About the Properties of Cycles in Components of South African Output 31
3.3 Stylised Facts About the Co-movement of Cycles in South Africa and Other Countries 33
4 Forecasting the South African Cycle 35
4.1 Composite Leading Indicators at the SARB 36
4.2 Financial Variables as Leading Indicators 40
4.3 Multivariate Approaches 45
4.4 Statistical Approaches 48
5 Countercyclical Macroeconomic Policy in South Africa 48
5.1 Fiscal Policy Pre-2008 49
5.2 Monetary Policy Pre-2008 50
5.3 Policy After 2008 51
6 Conclusions 52
References 52
The South African Economy in the Twentieth Century 58
1 Before 1910 59
2 Gross Domestic Product in the Twentieth Century 61
2.1 Sectoral Breakdown 62
2.2 Breakpoints 64
2.3 Living Standards 66
3 Cycles 68
3.1 Volatility 69
3.2 Co-movement 70
4 Conclusions 73
Appendices 74
Appendix 1 74
Appendix 2 77
References 78
Part II The Financial Crisis and Its Impact on the Cycle 80
Business Cycle Recoveries: A Comparative View 81
1 Recoveries 82
2 Methodology 84
2.1 Identification of Recovery Phases 84
2.2 Assessing Whether Recovery Is a Distinct Business Cycle Phase 85
2.3 Analysis of Recovery Phases 85
3 Data 87
3.1 Data for Cross-Country Comparative Analysis 87
4 Results: Recovery Phases in Business Cycles Internationally 88
4.1 Turning Points 89
4.2 Recoveries 89
4.3 Phase Statistics 92
5 Further Disaggregated Results on South African Cyclical Recoveries 93
6 Conclusions 96
Appendix 1 97
Appendix 2 99
References 103
The Role of Institutional Structure in Mediating the Impact of the Financial Crisis on the South African Business Cycle 105
1 Introduction 105
2 The Transmission Mechanism of the Crisis 106
3 Historical Sketch: The Global Crisis and South Africa 110
4 How Well Is South Africa Prepared for a Future Crisis? 113
5 Conclusion 115
References 115
Part III Key Drivers of the South African Business Cycle 117
A History of South Africa's Modern Business Cycle 118
1 Introduction 118
2 The Relative Roles of Exogenous and Endogenous Drivers 119
3 Identifying Periods of Structural Change 120
4 A Narrative Analysis of the South Africa Business Cycle 125
4.1 The Mid-1970s Economic Downturn Had Long-Term Features 125
4.2 The 1980s Lost Decade 129
4.3 The 1989–1996 Cycle: Green Shoots of New Beginnings 132
4.4 The 1997–2007 Cycle: Encouraging Evidence of Structural Advances 135
4.5 The 2007–2013 Cycle: Impact of the Great Recession and the Retrogression in SA's Governance 139
4.6 The 2013 to Date Economic Downturn—Resilience in Spending Become Unsustainable 143
5 Descriptive Analysis of Properties of South African Business Cycles 145
5.1 Key Characteristics of Turning Point Cycles 146
5.2 Business Cycle Volatility and Co-movement 153
6 Synthesis and Conclusions 161
Appendix 166
References 170
On the Estimation and Application of Structural Decompositions of the South African Business Cycle 174
1 Introduction 174
2 The DSGE Framework as a Modelling Paradigm 176
2.1 The Current State of DSGE 176
3 The Benchmark DSGE Model Framework 178
3.1 The Household Sector and Equilibrium Conditions 179
Consumption and Savings Behaviour 180
Labour Supply Decisions and the Wage-Setting Equation 180
3.2 Decision Problems of Firms and Equilibrium Conditions 181
Capital Goods Producers 181
Intermediate Goods Producers 182
Final Goods Sector 183
Government and Market Clearing 183
Exogenous Shocks 184
4 The Linearized System of Equilibrium Conditions 184
4.1 The Core New-Keynesian Specification 185
4.2 Extending the Model to the Open Economy 186
4.3 Extending the Model to the Financial Sector 188
5 Estimation 193
5.1 Estimation Methodology 194
5.2 Parameter Estimates 195
5.3 Identification and Model Sensitivity 202
6 What Structural Shocks Drive the South African Economy? 206
6.1 Impulse Response Analysis 206
6.2 Variance Decomposition 211
6.3 Historical Decomposition 217
7 Concluding Remarks 221
Appendix 1: Ireland's Three-Equation New-Keynesian Model 222
Appendix 2: The Open Economy 224
Aggregate Demand 224
Investment Schedule 224
Aggregate Supply and Inflation 225
(Real) Wage-Setting Equation 225
Domestic Production and Inflation (for Consumption Goods) 225
Imported Inflation (for Foreign Consumption Goods) 225
Inflation Aggregation Equations 226
Evolution of Relative Prices 226
Evolution of Capital 226
Policy Rule 226
Foreign Economy 227
Aggregate Equilibrium 227
Exogenous Shocks 228
Appendix 3: The Financial Frictions Model 228
Households 228
Entrepreneurs in Firm Production 229
Retailers and Labour Unions 230
Banking Sector 231
Monetary Policy and Market Clearing Conditions 232
Appendix 4: Tables and Figures 232
Appendix 5: Data and Sources 237
References 237
Part IV Predicting the South African Business Cycle 242
Business Confidence and the Business Cycle in South Africa 243
1 Introduction 243
2 Confidence 244
2.1 Theory on Confidence and Economic Outcomes 244
2.2 Empirical Findings 246
Measuring Confidence 246
The Impact of Confidence 249
3 Data: The BER Business Tendency Surveys 250
4 Methodology 252
4.1 Measuring Confidence 254
4.2 The Impact of Confidence 256
5 Results 258
5.1 Confidence Indicators 258
Turning Points 261
5.2 The Impact of Confidence 264
Bivariate VAR Analysis 264
Expanded VAR 265
6 Conclusion 266
References 267
Assessing the 2013 and 2017 Business Cycle Turning Points Signalled by the SARB's Composite Leading Business Cycle Indicator 270
1 Introduction 270
2 Defining the Business Cycle 272
3 Methodology 274
3.1 Composite Business Cycle Indicators 274
3.2 A Sequential Signalling System 275
3.3 Evaluating Indicator Turning Point Signals 275
4 Results 277
4.1 Historical Performance of the SARB's Composite Leading Indicator 278
4.2 Predicting the November 2013 Reference Peak 280
4.3 Assessing the Possibility of a Subsequent Lower Business Cycle Turning Point 284
5 Conclusion 287
References 289
Conclusions 290
1 The Global Financial Crisis, Structural Change, and the South African Business Cycle 290
1.1 The Cyclical Impact of Business Sentiment 291
1.2 The Resilience of the South African Cycle 291
1.3 The Impact of Financialisation on South African Growth 292
1.4 Exports as a Driver of South African Cycles 293
2 What Do We Now Know About the South African Business Cycle? 294
2.1 Measuring the Cycle 294
2.2 Forecasting the Cycle 295
2.3 Stabilizing the Cycle 295
References 296