Home

>

Can currency in circulation predict South African economic activity?

The forecasting of economic activity is of interest to governments, policymakers, researchers, investors and indeed all participants in the economy. While the South African Reserve Bank (SARB) publishes a number of formal indicators of economic activity, and researchers have managed to create substantial macroeconomic forecasting models, these indicators and models are usually quite complex and not always readily accessible. There is therefore ample scope for simplicity in the forecasting of economic activity. Indeed, a few well-chosen variables can perhaps be suitable indicators of future economic activity, without the need for complicated analyses or modelling of which to draw conclusions.

We construct a simple index of growth in real currency in circulation in the South African economy. The intuition is that increased currency in circulation is likely to be spent in the economy in the near future, therefore pointing towards a possible increase in economic activity. Traditionally, analyses of economic activity are concerned with the business cycle, which is formally published by the SARB. The formal business cycle, however, is a complicated exercise which incorporates in excess of 100 economic variables. We argue that analyses of the formal business cycle can be enhanced by other, complementary, measures of economic activity or output. We therefore deviate from the traditional view and propose that economic activity be measured by the output gap. To this end, we construct a dummy variable taking the value of Zt = 1 if the output gap is negative (i.e. output below trend), and Zt = 0 for a positive output gap. We subsequently utilise a probit framework, as popularised by Estrella and Hardouvelis (1991), to test how accurately our currency index can forecast these binary outcomes. In addition, we test the forecasting capability of the money stock (M3) in the same framework as a robustness check. Our models are estimated over the sample period 1980 – 2012.

It is found that the growth rate of real currency in circulation can predict economic activity up to 6 months ahead, whereas the money supply can predict economic activity up to 9 months ahead. Some valuable breakpoints can also be determined in the growth rates of currency and the money supply. If real currency in circulation grows by 1% or less, the probability of a slowdown occurring 6 months later is at least 60%. If real M3 contracts by 1% of more, the probability of a slowdown occurring 9 months later is 70%.

The relative simplicity of calculating the growth rates of monetary aggregates enables interested parties to form a forecast virtually instantaneously. Along with other well-known indicators, such as the yield spread or the SARB’s leading indicator, these variables can be valuable in supplementing any binary forecasting analysis.

Working paper 582
1 February 2016
SHARE THIS Policy Brief / Working Paper PUBLICATION:

Related South Africa’s Cities and Growth Spatial Challenges and Policy Interventions Content

Request for Proposals: The role of cities as drivers of growth and employment
Background Urbanization in South Africa is expected to reach 80% by...
Call for Work
South Africa’s future will be decided in our cities
Discussion Document 14 South Africa’s cities face multiple, overlap...
Dieter von Fintel, Justin Visagie, Ivan Turok, Takwanisa Machemedze, Claus Rabe, Sebastian Galiani, Edward Glaeser
Discussion Document
Monitoring South Africa’s metropolitan economies: A survey of the data landscape
Discussion Document 13 Disparities in data across different metropo...
Dieter von Fintel
Discussion Document
Cities, productivity and Jobs in SA: Problems and potential
Discussion Document 12 Cities contribute to national prosperity bec...
Ivan Turok, Justin Visagie
Discussion Document
Place-based economic policies: international lessons for South Africa
Discussion Document 11 Place-based policies are designed to support...
Harris Selod, Claus Rabe
Discussion Document
What luminosity data can and cannot reveal about South Africa’s urban economies
Discussion Document 10 As novel types of data are becoming availabl...
Takwanisa Machemedze
Discussion Document
Crime: A policy-oriented survey
Discussion Document 9 South Africa has a reputation for having high...
Sebastian Galiani
Discussion Document
Virtual CDE Workshop on SA Cities and Growth
Urban economics has provided powerful insights into how the charact...
Workshop

Search Resources

Ground Floor Brookside Building
11 Imam Haron Road
Claremont, 7700
Cape Town

PostNet Suite # 109
Private Bag X1005
Claremont 7735
Cape Town

Get Social