Important Channels of Transmission Monetary Policy Shock in South Africa

Abstract

This paper investigates the different channels of transmission of monetary policy shock in South Africa in a data-rich environment. The analysis contains 165 quarterly variables observed from 2001Q1 to 2012Q2. We use a Large Bayesian Vector Autoregressive model, which can easily accommodate a large cross-section of variables without running out of degree of freedom. The benefit of this framework is its ability to handle different channels of transmission of monetary policy simultaneously, instead of using different models. The model includes five channels of transmission: credit, interest rate, asset prices, exchange rate, and expectations. The results show that all channels seem potent, but their magnitudes and importance differ. The results indicate that the interest rate channel is the most important transmitter of the shock, followed by the exchange rate, expectations, and credit channels. The asset price channel is somewhat weak.

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