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Fiscal Policy Uncertainty and Economic Activity in South Africa

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  • Kevin Kotze

    (School of Economics, University of Cape Town)

Abstract

This paper considers the effect of fiscal volatility shocks on key macroeconomic variables. The identification of these shocks is derived from a stochastic volatility model that is applied to policy rules for each fiscal instrument. Thereafter, a vector autoregressive model makes use of these measures in a reduced-form setting to consider the effect of an aggregate fiscal volatility shock on economic output, consumption, investment, prices and interest rates. The final part of the analysis involves the construction of a dynamic stochastic general equilibrium model that may be used to investigate the effects of an unexpected increase in the volatility of each fiscal instrument. The results suggest that fiscal volatility shocks produce prolonged contractions in economic output, consumption and investment. In addition, the labour market is also negatively affected, while gross markups and inflation increase. Hence, it is suggested that fiscal volatility shocks have had an important adverse effect on economic activity in South Africa.

Suggested Citation

  • Kevin Kotze, 2017. "Fiscal Policy Uncertainty and Economic Activity in South Africa," School of Economics Macroeconomic Discussion Paper Series 2017-02, School of Economics, University of Cape Town.
    • Handle: RePEc:ctn:dpaper:2017-02
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    Cited by:

    1. Goodness C. Aye, 2021. "Effects of Fiscal and Monetary Policy Uncertainty on Economic Activity in South Africa," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(1), pages 167-187, March.
    2. Eugene Msizi Buthelezi, 2023. "Dynamics of Macroeconomic Uncertainty on Economic Growth in the Presence of Fiscal Consolidation in South Africa from 1994 to 2022," Economies, MDPI, vol. 11(4), pages 1-24, April.
    3. Aye, Goodness, 2021. "Effect of Fiscal and Monetary Policies on Economic Activities in South Africa: The Role of Policy Uncertainty," 2021 Conference, August 17-31, 2021, Virtual 314953, International Association of Agricultural Economists.
    4. Ozili, Peterson K, 2022. "Sources of Economic Policy Uncertainty in Nigeria: Implications for Africa," MPRA Paper 112075, University Library of Munich, Germany.
    5. Goodness C. Aye, 2021. "Effects of Fiscal and Monetary Policy Uncertainty on Economic Activity in South Africa," International Association of Decision Sciences, Asia University, Taiwan, vol. 25(1), pages 167-187, March.
    6. Goodness C. Aye, 2020. "Effect of Fiscal and Monetary Policies on Economic Activities in South Africa: The Role of Policy Uncertainty," Working Papers 202082, University of Pretoria, Department of Economics.

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