This paper employs the Bernanke-Gertler-Gilchrist "financial accelerator" model to study current economic conditions in South Africa. Given the turbulent financial market conditions we investigate the optimal monetary policy response as well as the potential role fiscal policy might play.
As typical in the literature, we find that monetary policy should not deviate from a standard Taylor policy rule that principally targets inflation. The optimality of the Taylor, however, depends on the hypothesized degree of integration between the financial sector and the real economy. Finally, we find that fiscal policy plays a significant role in stabilizing the economy.
About the authors:
Nicola Viegi is associate professor in Economics at the University of Cape Town. A graduate from the Scottish Doctoral Programme in Economics, he has held positions at the University of Strathclyde in Glasgow, at the University of KwaZulu-Natal and he is currently Visiting Scholar at De Nederlashe Bank. His main areas of research are economic policy theory, macroeconomic modeling and regional macroeconomic integration. Current research includes inflation targeting under uncertainty, monetary policy and assets prices, macroeconomic integration in Southern Africa.
Michael Parusel is an Economics Master student at the University of Cape Town. After graduating with a Bachelor of Business Administration from the Berlin School of Economics he worked in the Semiconductor industry for two years. In 2007 he completed his Honours degree in Economics at the University of Cape Town. His main areas of research are monetary policy and asset prices and sustainability questions around the South African current account.