Abstract
The purpose of this study is twofold. Firstly, business cycle theories have
been developed as early as 1911 (Shumpeter). These theories are well
researched and well documented, and all of these theories concentrate on the
real sector. South Africa is an emerging market and since 1994 the country
has liberalized its market, a process that holds advantages and
disadvantages. This emerging market status as well as the relative size of
imports and exports to GDP in South Africa, makes the country very
vulnerable to changes in the world economy. Examples of this are the
contagion from Asia in 1997, the Russian crisis in 1998, and the impact of
September 11 in the US on the South African economy.
Business cycles also have changed over the years; they are less volatile and
more synchronized over the world and the financial markets play a more
important role. This is another reason why it might be useful to identify a
financial cycle and investigate its relationship with the real cycle. The SARB
(South African Reserve Bank) has some financial indicators in its leading
indicator but the latter is mainly driven by real indicators. The financial cycle
identified uses the equity market, the capital market and the domestic financial
market as components. All of the determinants of these three components are
available at a higher frequency than the GDP growth (our proxy for the
business cycle); therefore the financial cycle can be used as a leading
indicator incorporating international and domestic financial events.
Secondly, an ongoing debate in business cycle research is the question of a
stable economy (business cycle) influenced by exogenous shocks or an
unstable economy with an endogenous business cycle (Classical vs.
Keynesian view). This issue will be addressed by modelling the business
cycle with a linear as well as a non-linear model. Linear models are usually
used to demonstrate exogenous shocks on the business cycle, whereas nonlinear
models have more of an endogenous assumption regarding the
business cycle. Non-linear models learn over time and adjust to the new level
of peaks and troughs and can therefore predict turning points more
accurately. This suggests that business cycles have changed since 1960: they
became less volatile, more synchronized across the world and the amplitude
of peaks and troughs is lower. Because of these characteristics it would be
useful to fit a non-linear model to the business cycle. However, exogenous
shocks cannot be totally ignored – especially in an emerging market such as
South Africa. The STAR (smooth transition autoregressive) model makes
room for a linear and a non-linear component, and can over time determine if
there is only a linear or non-linear component or sometimes both.
The results of this study support the structural or institutional view. They
believe economic fluctuations are caused by various structural or institutional
changes. Adherents to this view do not believe that the market system is
inherently stable or systematically unstable (Classical vs. Keynesian view).
They focus on structural changes and unpredictable events. They do not have
set ideas on economic policy. According to them the appropriate policy will
vary from time to time as circumstances change.
Prof. L. Greyling