MONETARY POLICY IN SOUTH AFRICA: A VECM APPROACH

Abstract

This study aims to analyse monetary policy's influence in South Africa by examining the effects of repo rates and inflation on economic development. The study makes use of annual time series data from 1966 to 2020. The study uses a VECM model and Granger causality tests to analyse the variables' short, long run, and causal relationships. The study revealed that actual interest rates had a modest positive correlation with economic growth in the short term but a significant negative correlation in the long run. M2 was found to negatively correlate with money supply, whereas M3 had a positive correlation in the short and long run. M1 has an inverse association with economic growth in South Africa in the short run but a positive link in the long run. As a result, the study suggests that the SARB must implement expansionary and contractionary monetary policies in the short and long run, respectively, to enhance South Africa's economic growth.