Global Growth and Financial Spillovers and the South African Macro-economy

Eliphas Ndou holds a Doctorate Degree in Economics from the University of the Witwatersrand and lecture at this university international finance and currently lectures. Currently works at South African Reserve Bank as an economist.Nombulelo Gumata holds a Masters Degree in Economics from the University of Johannesburg. She is an economist at the Reserve Bank of South Africa. She also lectures and tutors on part time basis at the Centre for Education in Economics and Finance Africa (CEEF.Africa). CEEF.Africa supports students who study with the University of London for degrees and diplomas in Economics and Finance. Students register with the University of London's distance learning programme and receive local comprehensive lecturing and tutoring and CEEF Africa.   Mthuli Ncube is Senior Research Fellow at University of Oxford, Blavatnik School of Government, UK. Between 2010 and 2014, he was Chief Economist and Vice President at the African Development Bank. He has also been Dean and Professor at Wits Business School, and Dean of Faculty of Commerce, Law and Management, at the University of the Witwatersrand (Wits). He was a Lecturer in Finance at the London School of Economics, UK. He has published widely in the area of finance and economics. He also has extensive experience as an investment banker and regulator. He is Chairman of the African Economic Research Consortium. He holds a PhD in Economics (Mathematical Finance) from University of Cambridge, UK.

• ContentsIntroduction1.1 Risk Aversion Strains, Asset Price And Spreads 1.2 Assessing Co-Movements In Asset Prices1.3 G7 Growth Versus South African Economic Growth1.4 Correlation Between South African Trade Variables And G7 Economic Growth1.5 South Africa's Export Shares Versus Global Economic GrowthPART I: GROWTH SPILL-OVER EFFECTS2. G8 Economic Growth Spill-Over Into South Africa252.1 Introduction2.2 Recent Growth Spill-Overs Evidence2.2.1 Regional Sources Of Growth Spill-Overs Evidence2.2.2 Evidence Of Various Channels Of Transmission2.3 Brief Discussions Of Various Economic Linkages2.3.1 Trade Patterns2.3.2 Foreign Inward And Outward Direct Investment2.3.3 Real Effective Exchange Rate Movements: Implications For Competitiveness2.4 Methodology2.4.1 Poirsson And Weber (2011) Growth Spill-Over Framework2.5 Data2.6 Empirical Analysis2.6.1 How Does South AfricanEconomic Growth Respond To G8 Growth Shocks?2.6.2 How Did South African Growth Evolve Pre, During And Post The 2008/09 Crisis?2.6.3 The Role Of Different Transmission Channels2.6.4 Third Country Growth Transmission2.7 ConclusionAppendix 2A Ordering SequenceVarious Counterfactual GraphsPART III: GROWTH SPILL-OVERS FROM BRIC3.1 Introduction3.2 Dissecting The Role Of China On South African Trade Dynamics3.2.1 South African Exports To China3.2.2 South African Imports From China3.3 Methodology3.3.1 Poirsson And Weber (2011) Growth Spill-Over Methodology3.4 Data3.5 Empirical Results3.5.1 How Did Bric Contribute To South African Growth During The 2008/09 Crisis And Beyond?3.5.2 The Role Of Different Transmission Channels3.5.2.1 Counterfactual Analysis Of Various Channels And Third Country Effects3.6 ConclusionAppendix 3AOrdering SequencePART IV: SPILL-OVERSOF FOREIGN FINANCIAL SHOCKS4. Spill-Overs Of Us Financial Shocks On The South African Economy4.1 Introduction4.2 Other Trade And Investment Dynamics 4.3 Recent Studies4.4 Var Methodology4.5 Data 4.6 Results 4.6.1 Review Of The Portfolio Balance Model And The Discussion Of The Results4.6.2 Does The Sample Size Alter The Responses?4.6.3 Comparison Of The Responses Of Real Interest Rates, Bond Yields And The Exchange Rate Over Various Periods4.7 ConclusionAppendix 4A5. Spill-Overs From The Euro Area Bond Yields On The South African Macro-Economy5.1 Introduction5.2 Dissecting The South Africa-Euro Area Trade Linkages 5.2.1 Changes In Export Shares5.3 Brief Review Of The Portfolio Balance Model Of Exchange Rate Determination5.4 Var Methodology5.5 Data5.6 Results 5.6.1 The Responses To Unexpected Positive Euro Area Bond Yield Shock5.6.2 The Responses To Unexpected Rise In Selected Effects Of Selected Euro Area Countries5.6.3 Robustness Analysis Using The Extended Sample Data 5.6.4 Counterfactual Analysis Using The Extended Sample Data5.7 ConclusionCapital Flow Effects And The Trade Balance 6. Capital Inflows And Asset Price Movements In South Africa6.1 Introduction6.2 Stylised Relationships During The Inflation Targeting Framework6.3 Recent Studies 6.4 Var Methodology6.5 Data6.5.1 What Are The Initial Responses Of The Variables On Impact?6.6 Results 6.6.1 Did Capital Inflows Impact Imports And Exports: Implication For Economic Growth 1206.6.2 What Are The Implications For Financial Stability?6.6.2.1 The Effects Of Capital Inflows On Financial Vulnerability Indicators 6.6.2.2. How Big Is The Role Played By Capital Inflows Shocks On The Evolution Credit Growth? 6.6.2.3 Residential Property Tobin's Q And Capital Inflows Effects 6.7 ConclusionAppendix 6a7. Portfolio Inflow And Outflow Effects On The Economy 7.1 Introduction 7.2 Stylised Facts Of Portfolio Flow Effects7.2.1 Do Net Portfolio Flows Increase Asset Price Returns? 7.2.2 How Does The Net Portfolio And Capital Inflows Impact Exchange Rate?7.2.3 Trends In Portfolio Flow Dynamics And Selected Variables7.2.3.1 Portfolio Flow Dynamics And Real Effective Exchange Rate Changes7.2.3.2 Portfolio Flow Dynamics And Stock Prices Inflation7.2.3.3 Portfolio Flow Dynamics And House Price Inflation 7.2.3.4 What Is The Relationship Between Portfolio Flow Dynamics And Economic Growth?7.3 Var Methodology7.4 Data7.5 Results 7.5.1 What Are The Effects Of Positive Inflation Shock On Various Inflows And Outflows?7.5.2 What Are The Effects Of A Contractionary Monetary Policy Shock On Capital Inflows And Outflows?7.5.3 What Are The Effects Of Portfolio Outflows And Other Forms Of Outflow Shocks?7.5.4 What Are The Effects Of Positive Portfolio Inflows And Other Forms Of Capital Inflows Shocks?7.6 Examining The Role Of Portfolio Flows On Dynamics Of Macroeconomic Variables Using Counterfactual Analysis7.6.1 Contributions Of Portfolio Flows Versus Domestic Factors Contributions On Asset Prices 7.6.2 Portfolio Flows Versus Asset Price And Domestic Factors: Counterfactual Economic Growth Analysis7.7. Unexpected Positive Interest Rate Differential Shock On Portfolio Flows Dynamics7.8 ConclusionAppendix 7a 8. Investment Slowdown And The Exchange Rate Effects On The Trade Balance 1528.1 Introduction8.2 Theoretical Linkages8.3 Trends In Selected Financial And Macroeconomic Variables8.4 Var Methodology8.5 Data 8.6 Results 8.6.1 Does The Evidence Change When We Add More Shocks?8.6.2 Which Components Of The Trade Balance Transmit The Shocks?8.7 Historical And Variance Decompositions8.9 ConclusionPART IV: EQUITY MARKETS INTERDEPENDENCE AND FINANCIAL STRESS9. Equity Markets Interdependence In Emerging Market Economies9.1 Introduction9.2 The Multivariate Var-Egarch Model9.2.1 Mean Equation 9.2.2 Variance Equation9.2.3 Covariance Relationship9.2.4 Summary Of The Relationships9.3 Data And Descriptive Statistics 9.4 Main Empirical Findings9.4.1 Conditional Mean Results9.4.2 Is There Evidence Of Asymmetric Transmission Based On Conditional Variance?9.5 How Vulnerable Is The South African Economic Growth To Unexpected Stock Price Returns And Volatility Shocks?9.5.1 Are There Any Differential Effects Between Stock Returns And Volatility On Economic Growth?9.5.2 To What Extent Do Stock Price Dynamics That Drive Fluctuations In Economic Growth Differ From Other Shocks?9.5.3 Do Stock Price Returns And Volatility Transmit Portfolio Outflow Shocks Into The Economy?9.5.4 Which Shock Between Stock Price Volatility And Monetary Policy Tightening Impacts Economic Growth The Most?9.5.5 How Would Economic Growth Have Evolved In The Absence Of Stock Price Returns And Volatility?9.6 Conclusion10. Financial Stress, Volatility And Economic Activity In South Africa 10.1 Introduction10.2 The Relationship Between Financial Stress And Macroeconomic Effects10.3 Recent Studies 10.4 Methodology10.5 Data And The Financial Stress Index For South African Economy10.6 Discussion Of The Financial Stress Index Effects On Economic Activity10.6.1 The Relationship Between Financial Stress And Economic Activity10.6.1.1 Granger Causality Results10.6.1.2 Impulse Response Analysis10.6.2 The Propagation Role Of The Financial Stress Index10.6.2.1 Does Financial Stress Index Propagates The Effects Of Inflation On Economic Activity?10.6.2.2 Does The Fsi Propagate The Response Of Interest Rates On Inflation Rate?10.7 The Effects Of Financial Stresses On The Policy Reaction Function10.8 Conclusion11. Conclusion

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