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A computable general equilibrium model of the monetary policy implications for financial stability in South Africa

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  • Conrad Beyers
  • Kojo A. Essel‐Mensah
  • Dimitrios P. Tsomocos

Abstract

The South African Reserve Bank (SARB) uses interest rates to control inflation. The Computable General Equilibrium (CGE) model can contribute to inflation targeting objective and also determine the effects on banks and the economy. We improved the accuracy of the results from previous work on the banking sector CGE model by estimating the elasticities of the reduced form equations of the model instead of arbitrarily choosing them. Our results conform with the established view that lower policy rates lead to an increase in inflation and a reduction in banks' profits. However, because of the adverse supply shocks arising from the effects of the COVID‐19 pandemic, the increase in the GDP is crowded out. The CGE model is a useful tool for the SARB for monetary policy implications on financial stability, informing and providing analysis on its repo rate decision, and determining the consequent effects on the economy.

Suggested Citation

  • Conrad Beyers & Kojo A. Essel‐Mensah & Dimitrios P. Tsomocos, 2024. "A computable general equilibrium model of the monetary policy implications for financial stability in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 92(4), pages 415-443, December.
    • Handle: RePEc:bla:sajeco:v:92:y:2024:i:4:p:415-443
    DOI: 10.1111/saje.12383
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    References listed on IDEAS

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