The Transmission of Monetary Policy in South Africa Before and After the Global Financial Crisis

This paper examines whether the transmission mechanism of monetary policy in South Africa has changed after the global financial crisis (GFC). We use a Bayesian vector autoregressive (BVAR) model with Minnesota priors and 15 monthly variables, extending the system of Christiano, Eichenbaum, with Evans (1999). The benefit of the BVAR approach is that it can accommodate a large cross section of variables without running out of degrees of freedom. To identify the change in the transmission process, we divide the sample size into two subsamples, namely the pre-GFC period (March 2001 to August 2008) and the post-GFC period (September 2008 to February 2016). The results indicate that a change in the transmission of monetary policy occurred after the GFC. The magnitude of the effect of a monetary policy shock on output is considerably greater in the pre-GFC period compared to the post-GFC period. Moreover, the impact of a policy shock on inflation is not statistically significant in the post-GFC period. The variance decomposition shows that the interest-rate channel has possibly weakened in the post-GFC period.