Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/329071 
Year of Publication: 
2024
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 12 [Issue:] 6 [Article No.:] 145 [Year:] 2024 [Pages:] 1-20
Publisher: 
MDPI, Basel
Abstract: 
Recently, several studies have argued about the interactions of the real economy and financial system, as well as the importance of financial cycles in business cycle fluctuations. To date, there exists near consensus among central bankers, economists, and other scholars that the financial cycle is an important source of business cycle fluctuations. This has raised the question of whether monetary policy should respond to financial instability and/or imbalances. As a result, we asked the following questions: Should monetary policy lean against the wind by targeting the aggregate financial cycle in South Africa? And what is the role of monetary policy in minimizing financial imbalances and instabilities in South Africa? The present article aims to provide answers to the above-mentioned question. Through the adoption of a multiple-equation generalized method of moments and structural vector autoregressive approaches, this article simultaneously estimates and compares both the finance-augmented and the conventional Taylor rules. It is shown that the South African Reserve Bank has considered developments in the aggregate financial cycle in setting its policy rate. Overall, there is clear evidence to conclude that the South African Reserve Bank can lean against the wind by targeting the aggregate financial cycle, but only as a genuine augmentation not as a fully flagged objective. This article adds new evidence to the South African literature on the prevailing debate of whether monetary policy should respond to developments in the financial system.
Subjects: 
business cycle
finance-augmented Taylor rule
financial cycle index
monetary policy
multiple-equation GMM
structural vector autoregressive modelling
JEL: 
E44
E61
G21
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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