Real interest rate persistence in South Africa : evidence and implications

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Authors

Das, Sonali
Gupta, Rangan
Kanda, Patrick T.
Reid, Monique
Tipoy, Christian Kakese
Zerihun, Mulatu F.

Journal Title

Journal ISSN

Volume Title

Publisher

Springer

Abstract

The real interest rate is a very important variable in the transmission of monetary policy. It features in vast majority of financial and macroeconomic models. Though the theoretical importance of the real interest rate has generated a sizable literature that examines its long-run properties, surprisingly, there does not exist any study that delves into this issue for South Africa. Given this, using quarterly data (1960:Q2-2010:Q4) for South Africa, our paper endeavors to analyze the long-run properties of the ex post real rate (EPRR) by using tests of unit root, cointegration, fractional integration and structural breaks. In addition, we also analyze whether monetary shocks contribute to fluctuations in the real interest rate based on test of structural breaks of the rate of inflation as well as Bayesian change point analysis. Based on the tests conducted, we conclude that the South African EPPR can be best viewed as a very persistent but ultimately mean-reverting process. Also, the persistence in the real interest rate can be tentatively considered as a monetary phenomenon.

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Keywords

Real interest rate, Monetary policy, Persistence, Mean reversion

Sustainable Development Goals

Citation

Das, S, Gupta, R, Kanda, PT, Reid, M, Tipoy, CK & Zerihun, MF 2014, 'Real interest rate persistence in South Africa : evidence and implications', Economic Change and Restructuring, vol. 47, no. 1, pp. 41-62.