Macroprudential and Monetary Policy Interactions and Coordination in South Africa: Evidence from Business and Financial Cycle Synchronisation

Abstract

The article reports on the interactions and possibility of coordination between macroprudential and monetary policies in South Africa, based on business and financial cycles synchronisation. To this end, relying on financial and economic time series indicators spanning the period 2000M01–2018M12, a two-step Markov switching dynamic factor model was adopted for the measurement of composite indices, while both the dynamic conditional correlations and asymmetric generalised dynamic conditional correlations models were adopted for synchronisation analysis, together with the Metcalfe scale of coordination. The empirical evidence obtained is such that, under conditions of financial and real economic stress in South Africa, when there is crisis management rather than crisis prevention, macroprudential policy and monetary policy decisions are complementary. Therefore, there will be limited/no need for coordination between the two policy decisions. However, under normal times when there is crisis prevention rather than management, macroprudential policy and monetary policy decisions are noncomplementary; hence, the greatest degree of coordination is warranted, even though it might not be easy. Therefore, we conclude that it is possible to the coordinate the conduct of macroprudential, and monetary policies based on the synchronicity of business and financial cycles.

Keywords

• financial cycles
• business cycles
• macroprudential policy
• monetary policy
• policy coordination
• dynamic conditional correlations