Harold Ngalawa

Monetary Policy and Industrial Output in the BRICS Countries: A Markov-Switching Model

Abstract This paper examines whether the five BRICS countries share similar business cycles and determines the probability of any of the countries moving from a contractionary regime to an expansionary regime. The study further examines the extent to which changes in monetary policy affect industrial output in expansions relative to contractions. Employing the Peersman and Smets (2001) Markov-Switching Model (MSM) and monthly data from 1994.01–2013.12, the study reveals that the five BRICS countries have similar business cycles. The results further demonstrate that the BRICS countries’ business cycles are characterized by two distinct growth rate phases: a contractionary regime and an expansionary regime. It can also be observed that the area-wide monetary policy has significantly large effects on industrial output in recessions as well as in booms. It has also been established that there is a high probability of moving from state one (recession) to state two (expansion) and that on average, the probabilities of staying in state 2 (expansion) are high for each of the five countries. It is, therefore, recommended that the BRICS countries should sustain uniform policy consistency (monetary policy), especially as they formulate and implement economic policies to stimulate industrial output.

The endogeneity of business cycle synchronisation in SADC: A GMM approach

Abstract Studies often conclude that the proposed Southern African Development Community monetary union would be disastrous and not optimal for all member countries. This is because of the observed low, and sometimes negative business cycle correlation amongst member countries. However, it has been demonstrated that the degree of synchronisation is not irrevocably fixed and is endogenous to certain economic factors. This study, therefore, sets out to investigate factors influencing business cycle synchronisation in the SADC region. More precisely, the study employs a generalised method of moments to investigate the influence of trade integration, financial integration, fiscal policy convergence, monetary policy similarity and oil prices (a proxy for global common shocks) on the degree of business cycle synchronisation. To conduct our analysis, we use data covering the period 1994–2014. In addition, we employ bilateral data as a way of getting around the problem of unavailability of aggregated regional data. The study finds trade, fiscal policy convergence and monetary policy similarity to have a sanguine impact on the degree of business cycle synchronisation. In addition, owing to their procyclical behaviour, it is observed that financial flows lead to diverging business cycles. Furthermore, the study finds that oil prices exert a negative impact on business cycle comovement in the SADC region. The study results have far-reaching policy implications for the proposed SADC monetary union. It is implied in the study findings that by stimulating trade and ensuring coherence in macroeconomic policies, SADC can move closer to being an optimal currency area.

Monetary policy transmission and growth of the manufacturing sector in Algeria

The principal objective of this study is to investigate the relationship between monetary policy and growth of the manufacturing sector in Algeria. Using a structural vector autoregressive model and quarterly frequency data for the period 1980Q1 to 2010Q4, the study finds no evidence that money supply responds to fluctuations in manufacturing sector growth or Gross Domestic Product (GDP) growth. Interest rates, however, are seen to explain nearly a third of the variations in manufacturing output growth, suggesting that the manufacturing sector is sensitive to interest rates. The study also reveals that money supply variations are largely explained by changes in interest rates. A peek at the monetary transmission process reveals that Algeria employs monetary aggregates as the primary operating tool of monetary policy. The monetary authorities adjust total money supply in response to any movements in the rate of interest, probably to keep the rate of interest within a certain target given other developments in the fundamentals. The interest rates, in turn, play an important role in determining variations in manufacturing sector growth. In addition, the interest rates significantly affect exchange rates, which are observed to respond to changes in overall GDP growth. It is the overall GDP growth that has the largest influence on manufacturing sector growth, probably due to strong forward and backward linkages between the manufacturing sector and other sectors of the economy.