Socially responsible investment and macroeconomic stability in south africa: an application of Vector Error Correction Model

Abstract

The study reported in this article investigated the relationship between the Social Responsible Investment (SRI) sector and macroeconomic stability in South Africa. Johansen co-integration approach and Vector Error Correction Model (VECM) were employed to test the relationship between SRI Index and a set of macroeconomic stability variables (inflation, real exchange rate, interest rates and money supply). Secondary data for the period April 2004 to December 2012 was analysed. There was a long-run association between all the variables during the period under consideration. However, the inflation rate, real effective exchange rate and money supply were not significant in predicting short-run changes in the SRI Index. A significant short-run relationship between SRI Index and the difference between long term and short-term interest rates (term structure) was observed. Macroeconomic variables are significant in explaining the behavior of the South African SRI sector in the long-run.