Can National Treasury do contractionary monetary policy?
Luchelle Soobyah and Nicola Viegi
Last Modified Date:
2022-08-10, 09:36 AM
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The long end of the South African yield curve has remained sticky and high for quite some time now, despite a low interest rate environment. In this paper we analyse the role of fiscal policy and its debt maturity structure which is producing this "monetary contraction" through its effect on the long end of the yield curve. We consider National Treasury’s government bond switch auction programme and its impact on bond yields and the economy. We show that these switch auction announcements have resulted in increased yields and shocks to bond prices via increased modified duration or price sensitivity. Using these shocks to bond prices as an instrument for debt, we find that the switches have also resulted in a contractionary effect on output and monetary policy.