Business cycles, fiscal policy and monetary integration in Southern African Development Community.
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Date
2018
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Abstract
This thesis investigated the selected macro-monetary topics in the Southern African
Development Community (SADC). The thesis is presented in three distinct but related
essays. The rst essay (Chapter 2) examines the extent to which business cycles
are synchronised in the SADC area using a dynamic factor model which separates
idiosyncratic shocks from common shocks (regional common shocks). Countries are
said to be synchonised if regional common shocks explain a large variance of withincountry
business cycles. Conversely, if a large variance of within-country business
cycles is accounted for by idiosyncratic shocks then countries are said not to be
synchronised. The study results have in-depth rami cations for the proposed SADC
monetary union. If business cycles are synchronised, it implies that provided that
other conditions for establishing a monetary union are satis ed, the use of a single
monetary policy may be optimal. Put di erently, if business cycles are driven by
common shocks then the use of a mutual monetary policy is warranted. The results
of the study show that the regional common factor is important for some countries,
and not for others. More precisely, it was discovered that regional common
shocks signi cantly explain most within-country business cycles in Botswana, South
Africa, Malawi, Tanzania, Democratic Republic of Congo, Lesotho, and Swaziland,
suggesting that a shared monetary policy could be considered among these countries.
In addition, the study demonstrated that idiosyncratic shocks play little or
no signi cant role in explaining within-country business cycles for most countries
considered in the sample. Idiosyncratic factors are found to be signi cant only in
Malawi, and Seychelles. The important nding emerging from the study results is
that, based only on the business cycles synchronisation condition, a monetary union
encompassing all SADC member countries would not be optimal.
The second essay (Chapter 3) examines the endogeneity hypothesis in the context
of the SADC area. In particular, a Generalised Method of Moments is used to similarity, and exogenous factors on the extent to which SADC member states are synchronised. Panel data covering the period 2000 to 2016 is used to conduct the
analysis. The study results show that trade integration positively affects business
cycles synchronisation, suggesting that promoting/or stimulating intra-SADC trade
could possibly result to intensified business cycles co movement in the bloc. In addition,
the study results show that macroeconomic policies' similarity (that is both
monetary and fiscal policies) exerts sanguine and statistically significant effect on
business cycles synchronisation. It was found that oil price changes have a decoupling
effect on regional business cycles. This could be explained by the fact that,
in the SADC region, some countries are net oil importers while other are net oil
exporters. Thus, the effect of oil movements depends on whether a country is a net
importer, or net exporter of oil. While a monetary union entails benefits to member states, it comes at the 'expense'
of the independence to alter monetary policy tools in order to deal with
country-specific business cycles. Hence, for union members, fiscal policy becomes
the only policy recourse available to deal with idiosyncratic macroeconomic disturbances/
or to mitigate conflicts over a preferred monetary policy. Therefore, fiscal
policy sustainability is crucial for the functioning of a monetary union. Unsustainable
fiscal policies may neither be a mechanism, nor effective tool for dealing with
country-specific disturbances, thus threatening the stability of a monetary union.
Hence, the third essay (Chapter 4) of this thesis examines the sustainability of fiscal policies in the SADC region using Bohn's (1998) fiscal policy reaction function. In particular, we employ dynamic panel models (that is, panel mean group, mean group, and dynamic fixed effects) to evaluate the response of government revenues to changes in public expenditures. Using data covering the period 1990-2016, the findings of the study reveal that public revenues positively react to changes in government expenditures. Thus, fiscal policies, in the SADC area, are found to be sustainable. However, the reaction coefficients are less than a unity, implying that investigate the role of trade intensity, financial integration, macroeconomic policy fiscal policies are 'weakly' sustainable. Therefore, we argue that SADC governments may face difficulties in marketing their debt in the future.
Description
Doctoral Degree. University of KwaZulu-Natal, Durban.