The impact of uncertainty shocks in South Africa: The role of financial regimes

Abstract

In 1964 (revisited in 1993), the late well-known Nobel Laureate in Economics, Milton Friedman, proposed the "guitar string" theory or better known "plucking model" for recessions, according to which he postulated that deep recessions are followed by rapid recoveries, just as a guitar string bounces right back after it is pulled and then released (Friedman 1964, Friedman 1993). However, the economic performance in many economies since the Great Recession of 2008-2009 has not followed that proposition, but instead economies globally experienced slow economic recovery. Many economists and policymakers, following the seminal work of Bloom ( 2009), have highlighted heightened economic uncertainty as the main source of this macroeconomic instability and anemic recovery. 1 While, traditionally, the transmission of uncertainty shocks has been linked to real frictions (Bernanke 1983;Bloom 2009), recent studies have documented the crucial role of financial frictions in the transmission mechanism (

Drivers of Realized Volatility for Emerging Countries with a Focus on South Africa: Fundamentals versus Sentiment

“…However, results are contingent on the state of the market, with the extremes/tails predictable in the short-run, and the median (normal) state in the long-horizon. At the same time, with stock market volatility also often interpreted as a measure of financial uncertainty, its predictability, based on the information contained in US fundamentals, should assist the South African policy authorities to design appropriate monetary and fiscal policy responses to prevent possible future recessions, especially if the future path of stock market volatility is expected to rise and produce a theoretically consistent reduction in economic activity [57].…”

Examining the Effect of Financial Markets Shocks on Financial Stability in South Africa

“…Consequently, financial stability was reported to be less influenced by SCRI and significantly affected by foreign debt and gross domestic product (GDP), also noting unemployment, household debt, balance of payment and interest rates as important variables of concern in this regard. Balcilar et al (2021) assessed the connection between uncertainty in the economy and conditions of the financial market in South Africa, using non-linear VAR. The study acknowledged that macroeconomic implications of an uncertainty shock is different across financial regimes.…”

How Does the Economic Uncertainty Affect Asset Prices Under Normal and Financial Distress Times?

“…Furthermore, studies such as Bernanke (1983), Bloom (2014), and others predict that rising uncertainty reduces economic activity through traditional real frictions. In addition to the real friction channel, recent studies have put forth the importance of financial friction (credit market conditions) in the propagation of uncertainty shocks (Alessandri and Mumtaz, 2019;Arellano et al, 2011;Balcilar et al, 2021; .…”