This document sets out SARB’s research agenda over the period 2021 to 2023. The agenda aims to generate research informing the three key policy areas of the Bank: monetary policy, microprudential policy and macroprudential policy.
The basic research questions are:
Poverty, inequality and unemployment remain the three main interlinked challenges facing the South African economy and society. While structural reforms are required to address them effectively, macroeconomic policy design and coordination should be supportive. The projects in this research agenda aim to enhance macroeconomic policy design and coordination across the Bank’s policy areas; improve the depth, operation and stability of the financial sector; and contribute towards a stable, growth-friendly macroeconomic environment.
Measuring and understanding the effectiveness of the transmission mechanism is critical to monetary policy. Transmission, however, changes over time and is affected by various long-term developments, including changes in global and South African neutral interest rates, shifts in inflation expectations, changes in exchange rate pass-through, greater integration with global financial markets, and the introduction of Basel III regulatory requirements. Cyclical and once-off factors can also play an important role, as seen with tightening financial conditions and heightened uncertainty since the global financial crisis. It is important to understand how these developments affect optimal monetary policy settings and the transmission of monetary policy, and develop recommendations to enhance the monetary policy implementation framework.
A key question in monetary policy is the degree to which changes in policy rates pass through to lending rates, and understanding conditions under which transmission changes. There are several factors that determine this relationship. For example, changes in risk premia, lending margins and demand for loans can affect the pass through. Another important driver of monetary policy transmission is competition among banks, in particular the way in which competition affects the supply of credit and the sensitivity of supply to policy changes. Structural factors such as labour market dynamics also affect policy transmission.
In practice, policy is implemented through setting interest rates and taking other actions across several connected but separate markets, including, for example, repurchase agreements, other short-term money markets and currency markets. These separate markets can obscure policy signals and, from time to time, generate inefficiencies and volatility. This area of the research programme will also assess the SARB’s liquidity management policy and the current reference rate proposal, and develop recommendations to enhance the monetary policy framework.
Since the implementation of inflation targeting almost two decades ago, the Bank has, in line with best practice, developed a suite of models as part of its modelling and forecasting strategy. It is critical to continuously review, develop and enhance the existing models to ensure their relevance. This is also essential for effective monetary policy implementation, which relies on economic forecasts and analysis using economic models. Over the next three years, we will explore new types of models, strengthen our range of models to solve specific forecasting concerns, and ensure we have the technical capacity and processes to keep existing models, especially the Quarterly Projection Model, up to date.
Climate change mitigation and adaptation will have extensive[CG1] , potentially rapid and, most likely, irreversible structural implications. Price and quantity adjustments of various kinds – including energy cost changes, growing demand for more energy-efficient products and services, and the revaluation of real and financial assets – will be far-reaching. Importantly, emerging and developing economies are almost invariably more exposed to climate change events because of the relatively large size of directly weather-dependent sectors (such as agriculture and food processing). They also are typically less resilient to climate change events and more vulnerable to the associated shocks.
Climate change and its structural implications will generate transition and physical risks, changing the composition of GDP growth and inflation dynamics in the economy. These, in turn, will affect the monetary policy and financial stability mandates of the SARB. These structural changes will also be driven by policy decisions in other countries that affect the global economy and the flow of capital into emerging markets. Understanding these structural changes and developing interventions to minimise the negative effects, while supporting positive developments, can improve economic and financial resilience and support low and stable inflation.
Within this part of the research agenda, we will aim to understand the impacts of climate change across the different mandates of the SARB, develop new tools to study these impacts and design policy responses to tackle climate-related risks.
Effective macroeconomic policy coordination is required for strong and sustainable economic growth. Yet policy has not always been coordinated over the last decade, with fiscal, macroprudential and monetary policies often working at cross-purposes. Effective policy coordination requires understanding the impact of these and other policy interventions and developing policy frameworks to respond in a coordinated way to changes in the economic environment.
Despite the strong links between monetary, fiscal and macroprudential policies, the SARB has not always been able to identify how policy changes in one area affect other policy areas, or to develop coordinated frameworks. Recently, central banks have started to fill this research gap by assessing the impact of macroprudential regulations on monetary policy in advanced economies.
The impact of fiscal policy on the macroeconomic environment has been a central issue for several years in South Africa, with growing concerns about the effect of fiscal risk on financial markets in particular. These risks affect the sovereign risk premium and the neutral interest rate. At the same time, financial institutions hold considerable amounts of government bonds (debt) because of both macroprudential regulations and higher bond returns. Banks are also affected indirectly by fiscal decisions through the impact of spending and tax decisions on economic growth and asset prices. These are important drivers of financial instability.
If the SARB understands these effects, it can improve policy design and execution to help achieve its objectives. The research outputs within this theme will inform the design of macroeconomic policy and the development of frameworks to support policy coordination.
While competition helps spur innovation and growth, too much competition can have negative effects, particularly in the banking sector where excessive competition leads to aggressive risk-taking and can harm financial stability. It is therefore important to analyse the financial stability implications of competition.
Potential financial stability issues arising from financial innovation are closely related within this theme. While fintechs bring opportunities to enhance financial sector efficiency and productivity, and thus the sector’s contribution to economic growth, they also introduce new risks to the financial system. The SARB’s research priorities include calibrating these potential risks to financial stability and developing an understanding of the channels through which such risks could affect financial sector stability.
Finally, financial inclusion – defined as access for enterprises and households to reasonably priced and appropriate formal financial services that meet their needs – remains an important research priority. It is a critical aspect of financial development and a driver of long-term, inclusive growth.