E44

Financial Markets and the Macroeconomy

Is Basel III counter-cyclical: The case of South Africa?

This paper develops a dynamic general equilibrium model with banking and a macro-prudential authority, and studies the extent to which the Basel III bank capital regulation promotes financial and macroeconomic stability in the context of South African economy. The decomposition analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal.

Effect of Financial Development on Economic Growth in sub–Saharan Africa: Does Sectoral Growth Matter?

This paper examines the overall economic growth effect when the growth in finance and real sector is disproportionate relying on panel data for 29 sub–Saharan African countries over the period 1980–2014. Results from the system generalized method of moments (GMM) reveal that, while financial development supports economic growth, the extent to which finance helps growth depends crucially on the simultaneous growth of real and financial sectors.

Measuring the Financial Cycle in South Africa

We measure the financial cycle in South Africa using three different methodologies, consider its main characteristics and examine its relationships with the business cycle and a measure of financial stress. We identify the financial cycle using credit, house prices and equity prices as indicators, and estimate it using traditional turningpoin analysis, frequency-based filters and an unobserved components model-based approach.

Credit frictions and co-movement of durable and non-durable goods in a small open economy

In this paper I investigate, numerically, the co-movement puzzle by testing the ability of borrowing and lending constraints to counter the opposite movement of durable and non-durable goods in response to foreign monetary policy and international bond shocks. I do this by simulating a small open economy sticky price model calibrated to the South African economy over the period 1990Q012014Q04.

Macroprudential policy and foreign interest rate shocks: A comparison of different instruments and regulatory regimes

This paper presents a generic small open economy real business cycle model with banking and foreign borrowing. We incorporate capital requirements, reserve requirements, and loan-to-value (LTV) regulation into this framework, and subject the model to a positive foreign interest rate shock that raises the country risk premium and reduces the supply of foreign funds. The results show that these macroprudential instruments can attenuate the impact of such a shock, and that this attenuation property increases with the strictness of the regulatory regime.

Flow specific capital controls for emerging markets

This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks.

Welfare analysis of bank capital requirements with endogenous default

This paper presents a tractable framework with endogenous default and evaluates the welfare implication of bank capital requirements. We analyze the response of social welfare to a negative technology shock under different capital requirement regimes with and without default. We show that including default as an additional indicator of capital requirements is welfare improving. When implementing capital requirements, a more aggressive reaction to the default rate is more effective for weakening the negative effect of the shock on welfare.

The welfare cost of macro-prudential policy in a two-country DSGE model

This paper builds a two-country DSGE model with financial frictions and investigates the welfare cost of macro-prudential policy and its impact on financial stability. The two countries in question are the U.S. and South Africa. The results show that macro-prudential policy results in a welfare trade-off between patient and impatient households.

Credit market heterogeneity, balance sheet (in) dependence, financial shocks

This paper presents a real business cycle model with financial frictions and two credit markets to investigate the qualitative and quantitative relevance of credit market heterogeneity. To address this line of inquiry we contrast the transmission of financial shocks in an economy where loans are the only form of credit to one in which both loans and bonds exist.

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