Patterns of co-movement between South Africa and Germany: Evidence from the period 1985 to 2006

Abstract

This paper examines the co-movement between Germany and South Africa by applying a dynamic factor model. Because these two countries have a long history of predominant trade ties, they deemed to be suitable proxies to analyse the channels of transmission of positive supply and demand shocks in a developed economy and the effects of these on an emerging market economy. In contrast to general expectations, the paper concludes that a German supply shock has more of a demand-shock effect on the South African economy, while a German demand shock is transmitted through price in South Africa. This implies that the policy response in South Africa should not necessarily be the same as in Germany.