The impact of South African monetary policy on output and price stability in Namibia

Abstract

Namibia is a member country of the Common Monetary Area (CMA) with Lesotho, Swaziland and South Africa. South Africa is the anchor country to which the smaller member states have surrendered monetary policy authority. This thesis therefore examines the empirical relationship between the South Africa repo rate (SArepo) on the one hand and Namibia's repo rate (Namrepo), Prime Lending Rate (PLR), Private Sector Credit Extension (PSCE), Consumer Price Index (CPI) and Gross Domestic Product (GDP) on the other hand. The credit channel of the monetary policy transmission mechanism informs the theoretical foundation of the thesis. Vector Autoregression modelling, variance decomposition and impulse response functions were used to explore the nature and strength of the relationship between the SArepo and said variables in Namibia. This thesis used quarterly data for the period 2003 to 2017. The variation in the Namrepo was predominantly explained by the SArepo, which confirmed that the Namrepo strongly followed the SArepo. The impulse response function results found that the impact of a contractionary monetary policy shock (an increase in the SArepo) lasted for up to six quarters before the effect started to fade. The Namrepo exhibited a positive response to an increase in the SArepo, although the magnitude of the response started to fade after the third quarter. The PLR, as a representative of market rates in Namibia, also exhibited a positive response to an increase in the SArepo. The results were similar for the Namrepo and the PLR because changes to the NamRepo are passed through immediately to the market interest rates. On the real variables, the study found that a contractionary monetary policy shock initiated in South Africa resulted in an increase in inflation in Namibia of less than 0.4 percent, whereas output declined by less than 1.0 percent. Interestingly, a Namibia (domestic) contractionary monetary policy shock resulted in a decline in prices of less than 0.4 percent. GDP, on the other hand, exhibited a positive response to a contractionary monetary shock, with an increase of less than 2.0 percent in the first four quarters of the period observed. The results reflected that a contractionary monetary policy shock from South Africa was more effective with regard to its impact on GDP; however, a domestic monetary policy shock was more effective at impacting on domestic inflation compared to the impact from South Africa.