Abstract:
The South African Reserve Bank (SARB) uses interest rates to
control inflation. The Computable General Equilibrium (CGE)
model can contribute to inflation targeting objective and also
determine the effects on banks and the economy. We improved
the accuracy of the results from previous work on the banking
sector CGE model by estimating the elasticities of the reduced
form equations of the model instead of arbitrarily
choosing them.
Our results conform with the established view that lower policy
rates lead to an increase in inflation and a reduction in banks’
profits. However, because of the adverse supply shocks arising
from the effects of the COVID-19 pandemic, the increase in the
GDP is crowded out. The CGE model is a useful tool for the
SARB for monetary policy implications on financial stability,
informing and providing analysis on its repo rate decision, and
determining the consequent effects on the economy.
