Working Paper: CEPR ID: DP3595
Authors: Janine Aron; John Muellbauer
Abstract: Forecasting models for output are presented to throw light on monetary transmission. Recent research finds multistep forecasting superior to recursive forecasting from a VAR model when structural breaks are present; there are important political and policy regime breaks in South Africa. The equilibrium correction models have a four-quarter ahead forecast horizon, appropriate for measuring interest rate effects. A stochastic trend measures underlying shifts in productivity and other supply side trends. The inclusion of important monetary policy regime shifts, which altered the output response to interest rates, and the control for other structural changes (e.g. trade liberalization), address the Lucas critique in forecasting output growth. There are important and persistent effects of high real interest rates, which significantly constrained growth in the 1990s, and significant potential growth benefits from fiscal discipline. South African growth appears to have become more responsive to the exchange rate with increasing trade openness in the 1990s.
Keywords: growth; monetary policy; transmission; multistep forecasting; structural breaks
JEL Codes: C22; C53; E32; E37; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High real interest rates (E43) | Reduced output growth (O49) |
| High real interest rates (E43) | Decreased investment (G31) |
| Decreased investment (G31) | Reduced output growth (O49) |
| Fiscal discipline (E62) | Potential output growth (O40) |
| Increased trade openness (F19) | Increased responsiveness of growth to exchange rate changes (F31) |