Working Paper 157 - How are the US Financial Shocks Transmitted into South Africa? Structural VAR Evidence

We investigate the impact of unanticipated United States (US) bond yield increases, federal funds rate tightening, and monetary stimulus shocks on the South African economy using structural VAR models. Firstly, the US monetary stimulus shock leads to weak consumer price inflation, rand-dollar appreciation, real stock price revaluation, bond yield declines, decline in monetary aggregates and real interest rates in South Africa. Despite the weak trade channel evidence, other findings are consistent with predictions of a small open economy Mundell-Fleming model. Secondly, an unanticipated positive US medium-term bond yield shock leads to rand-dollar depreciation and rising bond yields as predicted by the portfolio balance exchange rate model. This same shock leads to significant real stock price declines, which is consistent with portfolio re-allocation driven by change in US bonds yields. Thirdly, we find that unanticipated US federal funds rate tightening leads to significant increases in South African bond yields, rand-dollar depreciation and delayed consumer price inflation