Kevin S. Nell

The Endogenous/Exogenous Nature of South Africa's Money Supply Under Direct and Indirect Monetary Control Measures

The main purpose of this paper is to describe South Africas money supply process along several competing, but not mutually exclusive, theoretical paradigms over the period 1966-1997. The most important conclusion to be drawn from the empirical results is that irrespective of the monetary system at the time, the money supply process in South Africa is endogenously determined. The empirical analysis further shows that the inability of the South African Reserve Bank (SARB) to reach predetermined M3 monetary growth targets on a consistent basis since the mid 1980s is the direct result of an endogenous money supply and not, as a previous study claims, because of an unstable M3 velocity. Although the M3 velocity is stable over the whole period 1966-1997, money income determined an endogenous money supply, so that the M3 money supply lost its effectiveness as a leading indicator for monetary policy. The policy implication is that the SARB controlled the M3 money supply indirectly over the period 1980-1997, through an increase in interest rates, and at the potential cost of a slowdown in economic activity.(This abstract was borrowed from another version of this item.)

The Stability of M3 Money Demand and Monetary Growth Targets: The Case of South Africa

The main purpose of this article is to determine whether money should continue to play an important role in the formulation of monetary policy in South Africa, even though the monetary policy framework has recently changed to an inflation targeting strategy. Money can continue to play an important role in the formulation of an efficient monetary policy strategy as long as there is a stable money demand function and money contains useful information about future price changes. The paper presents empirical evidence of a constant and structurally stable M3 money demand function for South Africa over the period 1968-97. The analysis further shows that the non-constancies experienced during 1998-99 may only be temporary. Despite evidence of a stable M3 money demand function, the results indicate that M3 money provides little information about future price changes in South Africa and may therefore have lost its usefulness as a reliable indicator for monetary policy. The money stock is endogenous, with prices determining money through the stable M3 money demand function.

A 'Generalised' Version of the Balance-of-Payments Growth Model: An application to neighbouring regions

This paper applies a generalised version of Thirlwalls balance-of-payments (BOP) constrained growth model by testing for long-run relationships between the output growth rates of OECD countries and two neighbouring regions; South Africa (SA) and the rest of the Southern African Development Community (RSADC). The empirical results find strong support for the generalised BOP growth model, which stresses the mutual interdependence of the world economy where one countrys growth rate depends on others. Although the policy implications are not mutually exclusive, they may be viewed from the individual perspectives of SA and RSADC. SA is only BOP constrained with respect to OECD. The message to SAs policy makers is that faster growth rates may be the result of an improvement in the structural demand features of its exports to OECD. RSADC is only BOP constrained with respect to SA. Growth-promoting policies in SA may have a high and positive impact on the whole SADC region. Policy-makers in RSADC, however, are advised to reduce their dependence on SA by improving the structural demand features of their exports to OECD.

The structuralist theory of imported inflation: an application to South Africa

This study emphasizes the importance of identifying the origin of inflation in the present context of inflation targeting by many emerging market and transition economies. The analysis shows, based on South African data, how structural (supply) and demand inflation can be distinguished. The results indicate that South Africas inflation experience between 1973q1 and 1998q4 is characterized by two monetary regimes. During the first regime (1973q1–1984q4) the long-run cause of inflation is demand-pull. The second regime (1987q1–1998q4) represents major changes to structural (‘imported’) and cost-push inflation. The two-year period 1985–1986 signifies structural change from the first to the second regime. Moreover, the results in the second regime remain robust when the inflation model is subjected to ‘new’ out-of-sample data until 2001q2. Evidence of structural (‘imported’) inflation in the second regime suggests that inflation should not entirely be squeezed out of the system nor should it necessarily be kept at the lowest possible level, because some inflation may be regarded as the natural by-product of the growth and development process. South Africas inflation experience points to several lessons for existing (and potential) emerging market and transition economies with some form of inflation targeting.

STRUCTURAL CHANGE AND NONLINEARITIES IN A PHILLIPS CURVE MODEL FOR SOUTH AFRICA

The main objective of this article is to reexamine the role of the Phillips curve for monetary policy analysis in South Africa by augmenting the model for major structural changes in the balance-of-payments and labor market. The main findings show that a linear Phillips curve with an output gap in levels accurately describes South Africas nontrended inflation experience during 1971(Q1)-1984(Q4), whereas a piecewise concave curve with an output gap in growth rates correctly predicts the decelerating inflation pattern during 1986(Q1)-2001(Q2). The concave curve after 1985 imparts a deflationary bias that requires expansionary demand-side policies to stabilise the inflation rate. An important corollary is that expansionary demand-side policies can raise the average growth rate of the output gap over time without sacrificing stabilization objectives. (JEL C22, E3, E52) Copyright 2006 Western Economic Association International.

Demand-led versus supply-led growth transitions

This paper develops a saving/investment causality hypothesis to distinguish between demand- and supply-led growth transitions. The empirical application shows that Indias growth transition in 1980 entailed a shift out of a suboptimal demand regime (1953-78) into an optimal demand regime (1980-2007). A key insight from the causality results is that the fiscal expansion of the 1980s initiated demand growth at the natural rate, while faster export growth in the post-1990 liberalization period relaxed the open economy solvency constraint on demand and played a crucial role in sustaining demand growth at its maximum potential rate.

The Complementary Nature Between Technological Progress and Capital Accumulation in India's Long-Run Growth Transitions

type=main> This article develops a multiple-regime, learning-by-doing model, in which technological progress and capital accumulation are complementary factors in long-run growth transitions. The model accurately predicts Indias long-run growth transitions over the period 1953–2007, with the first phase (1980–2002) being ‘technology’ driven and the second phase (2003–2007) capital accumulation driven. Given the complementary nature between technological progress and capital accumulation, one of the main challenges facing Indian policy makers in the aftermath of the 2008 global financial crisis is to maintain high saving/fixed investment rates. The analysis also provides a critique of the ‘total factor productivity view’ of Indias growth performance.