Does the SARB respond to oil price movements? Historical evidence from the frequency domain

Abstract

Causality testing procedures in the frequency domain and the time domain are employed to analyse the relationship between oil prices and interest rate in South Africa, covering the time period 1936:1 to 2013:11. Results show that the time domain Granger causality test fails to reject the null hypothesis for the full-sample, and the test rejects the null hypothesis for the 3rd sub-sample (1998:12-2013:11), following structural break tests. Results for the frequency domain causality test show that, for both of these samples the null hypothesis is rejected at certain frequencies; at higher frequencies for the full sample, and at lower frequencies for the 3rd sample. With the majority of the 3rd sub-sample period coinciding with inflation targeting regime, results highlight that the South African Reserve Bank (SARB) seems to have systematically responded to oil price shocks.