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Testing the asymmetric effects of financial conditions in South Africa: A nonlinear vector autoregression approach

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  • Balcilar, Mehmet
  • Thompson, Kirsten
  • Gupta, Rangan
  • van Eyden, Reneé

Abstract

The negative consequences of financial instability for the world economy during the recent financial crisis have highlighted the need for a better understanding of financial conditions. We use a financial conditions index (FCI) for South Africa previously constructed from 16 financial variables to test whether the South African economy responds in a nonlinear and asymmetric way to unexpected changes in financial conditions. To this end, we make use of a nonlinear logistic smooth transition vector autoregressive model (LSTVAR), which allows for a smooth evolution of the economy, governed by a chosen switching variable between periods of high and low financial volatility. We find that the South African economy responds nonlinearly to financial shocks, and that manufacturing output growth and Treasury Bill rates are more affected by financial shocks during upswings. Inflation responds significantly more to financial changes during recessions.

Suggested Citation

  • Balcilar, Mehmet & Thompson, Kirsten & Gupta, Rangan & van Eyden, Reneé, 2016. "Testing the asymmetric effects of financial conditions in South Africa: A nonlinear vector autoregression approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 43(C), pages 30-43.
    • Handle: RePEc:eee:intfin:v:43:y:2016:i:c:p:30-43
    DOI: 10.1016/j.intfin.2016.03.005
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    More about this item

    Keywords

    Financial conditions index; Nonlinear vector autoregression; LSTVAR; Asymmetry;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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