Financial cycles synchronisation in South Africa. A dynamic conditional correlation (DCC) Approach

The study analyzed the extent of financial cycle synchronization, as represented by the Aggregate Financial Cycle and the Credit and Housing Cycle, in South Africa from 1975q1 to 2023q4 using the Dynamic Conditional Correlation model and the Vector Erro Correction Mechanism. Financial cycles are a significant source of systemic risks monitored by both the Prudential Authority and the South African Reserve Bank through macroprudential policies in South Africa. Understanding the interactions among these cycles can improve the formulation of such policies. The findings indicated a higher level of homogeneity in the stability, size, and movement of financial cycles compared to their relationship with business cycles, suggesting an increased synchronization of financial cycles. Additionally, the results highlighted strong correlations among financial cycles, intensifying during financial crisis episodes. This finding underscores that there are significant contagion effects during times of financial turmoil in South Africa. Moreover, the analysis revealed a positive long-term relationship between financial cycles, reflecting the procyclicality of the South African financial system and its tendency to amplify economic fluctuations, exacerbating both booms and busts. In light of these findings, policymakers should prioritize coordinated macroprudential measures to mitigate systemic risks, enhance financial stability, and bolster the resilience of the overall financial system, especially during times of crisis. The study looked at how different financial cycles connect over time in South Africa. The study found that during financial crises, problems in one part of the financial sector can quickly spread to others. This shows how risky the South African financial system can be, even when things seem to be going well. It's like a rollercoaster - both the ups and downs can be dangerous. Our findings mean that it's really important for the government to have strong macroprudential policy rules in place to protect the financial system, especially when things get tough. By doing this, we can help prevent big problems and make sure our economy stays healthy for everyone.