Table Of ContentEliphas Ndou
Thabo Mokoena
Inequality, Output-Inflation
Trade-Off and Economic
Policy Uncertainty
Evidence From South Africa
Inequality, Output-Inflation Trade-Off
and Economic Policy Uncertainty
Eliphas Ndou · Thabo Mokoena
Inequality, Output-
Inflation Trade-Off
and Economic Policy
Uncertainty
Evidence From South Africa
Eliphas Ndou Thabo Mokoena
Economic Research Department Department of Economic, Small Business
South African Reserve Bank Development, Tourism and Environmental
Pretoria, South Africa Affairs
Free State Provincial Government
School of Economic and Business Sciences
Bloemfontein, Free State, South Africa
University of the Witwatersrand
Johannesburg, South Africa
Wits Plus, Centre for Part-Time Studies
University of the Witwatersrand
Johannesburg, South Africa
ISBN 978-3-030-19802-2 ISBN 978-3-030-19803-9 (eBook)
https://doi.org/10.1007/978-3-030-19803-9
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Preface
This book shows empirical evidence in answering pertinent policy issues in
South Africa and the empirical analysis includes applying the simple tech-
niques to counterfactual analysis. The latter offers alternative scenarios. We
offer motivations in each chapter, policy implications and main highlights
which the readers may take out from reading the chapters. The material is
suitable for policymakers, market commentators, postgraduate students,
policy analysts, financial analyst, and academics. We cover areas that include
income inequality, output-inflation trade-off, and economic policy uncer-
tainty. Income inequality is a big issue and we determine if it can be due to
financial and monetary policies, influence of inflation threshold, and its role
as a conduit in transmitting shocks in the economy. This gap is extended
to determining how its presence may exacerbate the adverse effects of these
tight financial and monetary policies. The redistributive effects of monetary
policy and macroprudential policies in South Africa have not been inves-
tigated, despite much discussion about this in the advanced economies
following the financial crisis in 2007. We examine if the new Keynesian
proposition of policy ineffectiveness is applicable in South Africa. Despite
the differences which may arise amongst policymakers, it is important
to determine if the income distribution matters for the effectiveness of
v
vi Preface
monetary policy decisions, price stability, and financial stability. The book
has 34 chapters and each chapter provides the highlights of the main find-
ings and policy implications based on robust empirical analysis. We state
the motivations in each chapter, and use simple theoretical economic mod-
els. In certain estimations, we apply counterfactual analysis to offer alterna-
tive scenarios. The book is divided into the following thematic parts.
Areas Relevant to the South Africa Policy
Discussions are as Follows
Income Inequality, GDP Growth and Inflation Regimes
We begin by investigating the nexus between income inequality and GDP
growth in South Africa and determine whether the 4.5% consumer price
inflation threshold and other channels matter in this nexus. We further
determine if the inflation rate below 4.5% matters for the distributional
effects of positive inflation shocks on income inequality in South Africa.
Inequality and Monetary Policy
We determine the extent to which the income inequality channel
impacts the transmission of monetary policy shocks to economic activ-
ity, and, whether monetary policy shocks influence income inequality
dynamics in South Africa. Given that South Africa is an open economy,
we examine the roles of trade openness and financial globalisation chan-
nels in transmitting monetary policy shocks to income inequality.
The Role of the Monetary Policy Channel in Transmitting
Shocks to Income Inequality
The shares of employment in the manufacturing sector has been declin-
ing while those of the services sector has been rising. The book examines
the extent to which monetary policy impacts the effects of manufactur-
ing sector and services employment shares shocks on income inequality.
Preface vii
Consumption Inequality
The book brings new insights into the relationship between income ine-
quality and consumption inequality. This includes determining whether
the consumption inequality channel impacts the transmission of posi-
tive income inequality shocks to credit dynamics in South Africa, and
this is based on data before 2009Q1. This analysis further investigates
whether price stability impacts the link between income inequality and
consumption inequality.
Macroprudential Policy and Income Inequality
We examine the effects of the shocks to selected macroprudential tools
on income inequality. This motivates us to determine whether positive
excess capital adequacy ratio shocks and unexpected loosening of loan
to value ratio have any redistributive effects via the inequality chan-
nel. We add the National Credit Act to determine its influence on the
growth of income inequality. We conclude by examining the effects of
an unexpected loosening in the labour market reforms on the evolution
of growth of income inequality in South Africa.
Bank Concentration and Income Inequality
and Other Channels
The South African banking sector has been described as oligopolistic
and highly concentrated and this may impact real economic activity.
The book gives insights by examining how unexpected increase in the
bank concentration impacts economic growth, income inequality and
employment in South Africa.
Output-Inflation Trade-Off and the Role of Inflation
Regimes
This part examines if there is evidence of the trade-off in output and
inflation volatilities in South Africa. In addition, we determine the
viii Preface
extent to which the output-inflation trade-off exist in South Africa and
if it is impacted by the 6% inflation threshold. The part further deter-
mines whether inflation regimes affect the transmission of nominal
demand shocks to the consumer price level and whether positive nomi-
nal demand volatility shocks reduce the output-inflation trade-off.
Output Growth Persistence and Inflation
This part determines the link between the persistence of output growth
and inflation regimes. We further determine if the effects of expansion-
ary monetary policy shocks on output persistence depend on inflation
regimes.
Economic Policy Uncertainty, Expansionary Monetary
Policy, and Demand Policy Shocks
Economic policy uncertainty was heightened after the recession in 2009
and its impact on monetary policy transmission mechanism has not
been examined in South Africa. In this context, we examine whether the
economic policy uncertainty channel impacts the influence of expan-
sionary monetary policy changes on output dynamics, bank lending
rate margins and pass-through of the repo rate to bank lending rates.
The analysis shows how inflation impacts the effects of expansion-
ary monetary and fiscal policies on real GDP growth. We estimate the
time-varying pass-through of the lending rate responses to the repo rate
changes and loan intermediation mark-ups.
Economic Policy Uncertainty and the Lending,
Credit and Corporate Cash Holding Channels
We extend the analysis of the effects of economic policy uncertainty
into understanding the dynamics in the lending rates, credit dynamics,
and companies’ cash holdings. We examine the extent to which credit
growth reacts to expansionary monetary policy shocks is impacted by
Preface ix
heightened economic policy uncertainty. In addition, the book inves-
tigates whether companies’ cash holdings impact the transmission of
economic policy uncertainty shocks to capital formation. To derive pol-
icy implications, we show that an increase in the value of companies’
cash holdings impacts the transmission of expansionary monetary pol-
icy shocks. The book concludes by showing the effects of an unexpected
reduction in economic policy uncertainty on inflation expectations.
Policy Implications
Inequality Income Should Be Eradicated and Inflation
Threshold Matters
Policymakers should eradicate the rising income inequality as it lowers
GDP growth and they should implement policy initiatives that should
reduce income inequality over a long horizon rather than reduce inequal-
ity transitorily. Price stability matters for the reduction in the growth of
income inequality to positive inflation shocks in the inflation bands (1)
below 3% and (2) when inflation is below the 4.5% threshold. Evidence
shows that, although income inequality is not being depicted in the stand-
ard monetary policy transmission mechanism, there is need for it to be
considered as part of the transmission mechanism. Policymakers should
enhance their understanding of the ways in which monetary policy deci-
sions, income inequality, and aggregate economy, are intertwined as this
will enable an efficient design and implementation of monetary policy.
Policymakers Should Put Mechanism in Place
to Mitigate the Redistributive Effects of Structural
Transformation
Policies should be put in place that focus on ensuring more inclusive
gains from structural transformation and policymakers should facilitate
the reskilling of workers and reduce the costs of their reallocation costs
when the services sector is growing at the expense of other sectors.
x Preface
Price Stability Should be Considered in the Link
Between Income Inequality and Consumption
Inequality
Macroprudential regulators should put mechanisms in place to pre-
vent credit extension that is not driven by fundamentals such as con-
sumption inequalities, as this may lead to crises and unproductive uses.
Evidence indicates that consumption inequality and inequalities in the
consumption categories amplify the increase in credit due to positive
income inequality shocks. Policymakers should enforce price stability to
weaken the link between income inequality and consumption inequal-
ity. A counterfactual VAR analysis indicates that high (low) inflation
amplifies (dampens) the increase in consumption inequality to posi-
tive income inequality shocks when inflation exceeds the 6% threshold.
Thus, price stability matters and policymakers should pay attention to
the existing structural issues in the economy and determine how these
impacts on their expected policy decisions.
Redistributive Effects of Macroprudential Policies,
Labour Reforms, and Banking Sector Concentration
Increased income inequality growth, following positive excess CAR
shocks, and tightening standards in the National Credit Act (NCA), exac-
erbates the decline in the real economic activity, implying that policy-
makers should cast their nets wider than financial regulatory reforms and
should also consider the effects of their policy changes in influencing the
distributive patterns (Perugini et al. 2016). The income inequality chan-
nel is a potent transmitter of the effects of excess CAR shocks, tight NCA
shocks and unexpected loosening in the loan to value ratio to real eco-
nomic activity. Hence, policymakers should decisively eliminate the high
levels of income inequality as these distort the transmission mechanism of
macroprudential policies. Policymakers should lower entry barriers to the
banking sector and introduce a sliding scale of capital adequacy ratios that
increase with the size of the banks. An unexpected loosening in the labour
market reforms reduces income inequality growth when complemented
