No 11: The framework of the monetary block's equations in the South African Reserve Bank econometric mode
S de Jager
Last Modified Date:
2020-10-01, 09:31 PM
Publications > Occasional Papers
The South African Reserve Bank has been set the task of formulating and conducting monetary policy. To this end, it is necessary for the Bank to take cognisance of the dynamic structural inter-relationships of the economy. A systematic quantitative framework of the monetary sector can therefore be of invaluable assistance when the implementation of a certain policy measure is contemplated. The aim of this study is to construct a fairly detailed model of the inter-relationships of the monetary sector, and to incorporate such a substructure into the South African Reserve Bank's quarterly econometric model. The inclusion of a set of monetary equations not only augments the forecasting power of the model, but also provides a reasonable framework in which the impact of alternative monetary policies can be evaluated. The study firstly outlines the fundamental theory behind the demand for and supply of money. Certain features of the monetary sector's balance sheet and monetary policy in general are then reviewed. This is followed by pertinent aspects with regard to data selection and the technique that has been applied to estimate the behavioural relationships. Then the different estimated equations are discussed in a fair amount of detail, followed by a short summary of the linkages between the monetary model and the main model. Alternative simulations are used to demonstrate the macroeconomic impact of selected monetary policy changes and shocks. Finally, some concluding remarks concerning the relevance of the study are made.