Abstract
This dissertation analyses the spillover effects of external financial conditions onto South Africa using quarterly domestic and international data from 1996Q1 to 2014Q4. First, principal component analysis and an vector autoregressive model are utilized to build financial conditions indices for South Africa and its trading partners, namely, China, Germany, the United States, Japan, the United Kingdom, Netherlands, Italy, France and Belgium. Consistently across both methodologies, the financial conditions indices obtained track each other fairly well and capture the 2008/09 global financial crisis. Second, a Global Vector Autoregressive model comprised of composite financial indices and other macroeconomic variables is implemented to assess how international financial shocks spillover into South Africa.
Our findings show that a sudden tightening of the United States financial conditions has a significant but short lived effect on the South Africa’s real GDP growth while the spillover effects from other trading partners appear to be of negligible impact throughout the sample period. Furthermore following a shock in South Africa’s financial conditions domestic real GDP growth declines instantaneously and persistently over the entire horizon. On average South Africa’s financial shocks subtract 1% from GDP growth over a year.
M.Com.