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Research on tax elasticities in South Africa mainly employs linear models and shows that taxes evolve symmetrically irrespective of the economic cycle. This study extends this research to show that taxes behave asymmetrically and nonlinearly during expansions and contractions. Estimated linear elasticities imply that a one percent expansion in the cycle increases personal income tax, corporate income tax and value added tax by 1.43, 2.52 and 0.99 percent, respectively. However, estimated nonlinear elasticities are significantly different. During an expansion, the above elasticities increase by 1.89, 2.76 and 2.17 percent, respectively while during a contraction phase these elasticities increase by 0.89, 0.88 and 0.82 respectively. This finding of low tax collection during economic contractions has important implications for fiscal sustainability and overall fiscal prudence in South Africa. The findings of high tax elasticities during expansions might explain the underestimation of revenue by the government.

This paper describes a modeling methodology that embeds climate damages from natural disasters and risk management strategies into a macroeconomic model for Jamaica. The modeled damages take the form of capital destruction, and the risk management strategies considered are (i) adaptation investment in hurricane resilient infrastructure, (ii) commercial disaster insurance for the government, (iii) the formation of a contingency fund, and (iv) lower debt via higher future primary balances to create fiscal space for disaster recovery. Different risk management strategies are compared to a baseline of no risk management. The model behavior is estimated empirically on country-specific data. Hurricane damage and the model results are analyzed in deterministic and probabilistic settings, using the historical distribution of damages for Jamaica.

Purpose
The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy.


Design/methodology/approach
The authors use a sign restricted SVAR with an endogenous feedback of stochastic volatility to evaluate the sign and size of uncertainty shocks. The authors use a nonlinear DSGE model to gain deeper insights about the transmission mechanism of monetary policy uncertainty.


Findings
The authors show that monetary policy volatility is high and constant. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. The DSGE model shows that the size of the uncertainty shock matters – high uncertainty can lead to a severe contraction in output, inflation and interest rates.


Research limitations/implications
The authors model only a few variables in the SVAR – thus missing perhaps other possible channels of shock transmission.


Practical implications
There is a lesson for monetary policy: monetary policy uncertainty, in isolation from general macroeconomic uncertainty, often creates unintended adverse consequences and can perpetuate a weak economic environment. The tasks of central bankers are incredibly difficult. Their models project output and inflation with relatively large uncertainty based on many shocks emanating from various sources. It matters how central bankers react to these expectations and how they communicate the underlying risks associated with setting interest rates.


Originality/value
This is the first study that looks into monetary policy uncertainty into South Africa using a stochastic volatility model and a nonlinear DSGE model. The results should be very useful for the Central Bank as it highlights how uncertainty, that they create, can have adverse economic consequences.

The successful conduct of monetary policy relies on accurately characterising inflation's data generating properties. Monetary policy errors that allow inflation to transition to a high inflation regime that is very persistent might have costly economic implications as the central bank attempts to bring inflation to a lower regime, say at some target level. This paper studies the duration of inflation persistence over time and across various policy regimes. We test the inertial properties of South African inflation in a Markov-Switching autoregressive fractionally integrated moving average model. We isolate period of high inflation and low inflation and analyse how persistent it is. This is an unique application to South Africa. The use of a fractional differencing ARIMA model allows for the possibility that inflation is close to a unit root, however, still mean reverting. This implies that shocks to inflation is very persistent and take long to dissipate. The inflation persistence is measured using a test by Ng and Perron (2001). We show that inflation is more persistent during high inflation episodes relative to low inflation episodes and more volatile during low inflation periods compared to high inflation periods. We estimate that it takes approximately 70 months for 50 percent of the shocks to dissipate in a high inflation regime compared to 10 months in a low inflation regime. The model identifies three structural breaks - a low inflation regime from 1920 until 1960, a high inflation regime from 1961 until 2003, and another low inflation regime over part of the inflation targeting period, 2003-2014. We also show that inflation persistence in the high inflation regime transitioned to a low inflation regime only much later than the implementation of inflation targeting - hinting that agents take time to adjust expectations. This has an important consequence for monetary policy - monetary policy errors that allow inflation to transition to a high inflation regime may take many months for any corrective policy to become effective.

Purpose
– The authors analyse the relationship between the South African real exchange rate and economic fundamentals – demand, supply and nominal shocks. The paper aims to discuss these issues.


Design/methodology/approach
– The authors use a time-varying parameter VAR to study the coherence, conditional volatility and impulse responses of the exchange rate over specific periods and policy regimes. The model is identified using sign-restrictions that allow for some neutrality of impulse responses over contemporaneous and long horizons.


Findings
– The results suggest that the importance of fundamental shocks on the exchange rate is time dependent. Hence there is a loss in information when using standard linear models that average out effects over time. The response of the exchange rate to demand and supply shocks have weakened over the 1994-2010 period.


Research limitations/implications
– The period following financial crisis has strengthened the relationship between supply and demand shocks to the exchange rate, but has weakened the relationship between interest rate shocks and the exchange rate response.


Practical implications
– This paper provides deeper insight as to how the exchange rate responds to fundamental shocks. This should help monetary policy understand the consequences of interest rate decisions on the exchange rate and the indirect effect of inflation on the exchange rate.


Originality/value
– This application is new to the South African literature. The authors propose that the use of interest rates is limited in affecting the value of the rand exchange rate over particular periods. Isolating fundamental shocks to exchange rates over time helps policy makers make clearer and more informed decisions.

Purpose– This paper aims to study the interplay of fiscal policy and asset prices in a time-varying fashion.Design/methodology/approach– Using South African data since 1966, the authors are able to study the dynamic shocks of both fiscal policy and asset prices on asset prices and fiscal policy based on a time-varying parameter vector autoregressive (TVP-VAR) model. This enables the authors to isolate specific periods in time to understand the size and sign of the shocks.Findings– The results seem to suggest that at least two regimes exist in which expansionary fiscal policy affected asset prices. From the 1970s until 1990, fiscal expansions were associated with declining house and slightly increased stock prices. The majority of the first decade of 2000 had asset prices increasing when fiscal policy expanded. On the other hand, increasing asset prices reduced deficits for the majority of the sample period, while the recent financial crises had a marked change on the way asset prices affect fiscal policy.Originality/value– This is the first attempt in the literature of fiscal policy and asset prices to use a TVP-VAR model to not only analyse the impact of fiscal policy on asset prices, but also the feedback from asset prices to fiscal policy over time.

Policy toward fiscal rules is an important issue in the countries of the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia). According to a rough estimate, the countries with rules (all but North Macedonia) have complied with their debt and overall-deficit rules a little more than half the time. An online survey, conducted for this paper, suggests that public understanding of the rules is limited, which may reduce the political pressure for compliance. To get debt down to prudent levels, Albania and Montenegro will need a strong commitment to complying with their fiscal rules and will often have to do more than their deficit rules require. The following principles should guide future policy toward fiscal rules: more emphasis should be given to ensuring that fiscal rules are widely understood and enjoy the support of a broad range of stakeholders; policy toward the rules should be consistent with accession to the European Union, but the rules should be simpler than the European Union's and the debt limits lower; limits in rules should not be mistaken for targets; and public financial management should be improved to support the implementation of rules.