An investigation on the effectiveness of monetary policy implementation by the South African Reserve Bank (SARB) in controlling consumer expenditures

Abstract

This study investigates the effectiveness of monetary policy as implemented by the South African Reserve Bank, in controlling consumer expenditures in the country. More specifically, the analysis focuses on the possible effect of the repo rate variations by the SARB, through its effect on commercial bank's credit extension, on consumer expenditures. Although the transmission of monetary fluctuations, through interest rate variations, to real economic variables such as consumption has dominated macroeconomics since at least the eighteenth century. However, empirical studies conducted in investigating the effects of interest rates on consumer expenditures have yielded inconsistent results, with the observation that many available analysis on this topic failed to establish a clear association, positive or negative, between those variables. This reinforces the common view that, the debate about the real effects of monetary policy, through interest rate manipulations, on consumer expenditures is still widely open, especially as far as emerging markets like South Africa are concerned. The empirical test of whether monetary policy, through interest rate, is a significant determinant of the general level of consumption is performed in this study with aggregate time series data of South Africa for the period 1970 - 2006. The existence of a long-run relationship between policy interest rates and consumer expenditures is tested using Johansen's cointegration test, along with Error Correction Model (ECM), as the research aims to establish the existence of the interest rate channel of monetary policy, within the current policy framework implemented by the Reserve Bank. Although the empirical analysis in the end shows only a small sensitivity of consumer expenditures to variations in interest rates/repo rate by the SARB, it is sufficient for this study to establish the existence of an interest channel of monetary policy transmission in South Africa. However, the importance of time lags associated with any particular act of monetary policy appears to be a more crucial factor in assessing the effectiveness of policy actions by the Reserve Bank.