This paper examines how the short-term and long-term interest rates react to supply, demand and monetary policy shocks in South Africa. Use is made of the impulse response functions obtained from the structural vector autoregressive model with long-term restrictions. We find a positive correlation between the two interest rates after a monetary and demand shock and a negative correlation after a supply shock. The finding of this paper signifies that the operation of the monetary transmission mechanism should be effective in South Africa. Furthermore, the finding of this paper provide an approach to identify supply shocks in the South African business cycle.
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