Monetary Policy In South Africa

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CHAPTER ONE: INTRODUCTION AND BACKGROUND 1.0 INTRODUCTION Monetary policy and the yield curve have long been a subject to interest by researches and the debate has generated many, but, diverse conclusions. Monetary policy forms part of overall economic policy pursued by the monetary authorities independently of the government. In South Africa it is called the South African Reserve Bank (SARB) due toVan der merwe and Mollentze (2010). The monetary policy is the control of monetary variables such as monetary aggregate or interest rates to achieve economic growth by ensuring price stability, employment growth, interest rates stability, financial market stability and stability in the foreign exchange market Mishkin (2009), in south Africa the…show more content…
Interest rate is an important variable that changes on a daily basis and investors look up to in order to make investment decision, yet the South African reserve bank has a direct control on this variable. Therefore without the knowledge of the term structure of interest rate and how monetary policy impacts it, investors would not be able to predict interest rate and make vital investment decisions. 1.2 OBJECTIVES The main objective of this dissertation is to identify the impact that monetary policy has on the yield curve in South Africa and to look at trends of both monetary policy and the yield curve in South Africa. To achieve this main objective, the following specific objectives will be pursued; a) To use movements in stock prices, growth in money supply and the index of leading economic indicators to assess if any of these indicators perform better than the yield curve; b) To assess if monetary policy is responsible for the yield curve's predictive power with regard to future economic…show more content…
However, Nel’s study only covers the period between 1974 and 1993 and is outdated since major structural changes took place in South Africa's economy since 1994. Moolman (2002) only uses the slope of the yield curve predict recessions and does not compare its performance with other financial indicators to see if the yield spread does better. Several studies in other countries show that economic indicators like stock prices, money supply growth, leading economic indicator indices, spreads between government and commercial paper and foreign term spreads also possess useful information for predicting the business cycle (see Dueker, 1997; EstreJla and Mishkin, 1998; Atta-Mensah and Tkacz, 1998; Moneta, 2003). It would be interesting to find out if such variables perform better than the yield in South Africa. One other limitation of Moolman's study is that it does not cover one crucial period (2003) when the yield curve
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