Financial cycles synchronisation in South Africa. A dynamic conditional correlation (DCC) Approach

Abstract

AbstractThe study analyzed the extent of financial cycle synchronization, as represented by the Aggregate Financial Cycle and the Credit and Housing Cycle, in South Africa from 1975q1 to 2023q4 using the Dynamic Conditional Correlation model and the Vector Erro Correction Mechanism. Financial cycles are a significant source of systemic risks monitored by both the Prudential Authority and the South African Reserve Bank through macroprudential policies in South Africa. Understanding the interactions among these cycles can improve the formulation of such policies. The findings indicated a higher level of homogeneity in the stability, size, and movement of financial cycles compared to their relationship with business cycles, suggesting an increased synchronization of financial cycles. Additionally, the results highlighted strong correlations among financial cycles, intensifying during financial crisis episodes. This finding underscores that there are significant contagion effects during times of financial turmoil in South Africa. Moreover, the analysis revealed a positive long-term relationship between financial cycles, reflecting the procyclicality of the South African financial system and its tendency to amplify economic fluctuations, exacerbating both booms and busts. In light of these findings, policymakers should prioritize coordinated macroprudential measures to mitigate systemic risks, enhance financial stability, and bolster the resilience of the overall financial system, especially during times of crisis.

Keywords

• Financial cycles
• business cycles
• monetary policy
• macroprudential policy
• Elliott Caroline
• Editor-in-Chief