1 Introduction 1
1.1 Aims of the Book 3
1.2 Policy and Academic Gaps Filled in the Book 5
1.2.1 Part One: The Effects of Government Debt
Dynamics 5
1.2.2 Part Two: The Effects of Fiscal Budget Defcit
Dynamics 7
1.2.3 Part Three: The Effects of Interest Rates and
Debt Service Costs on Government Debt 7
1.2.4 Part Four: The Macroeconomic Effects of
Economic Policy Uncertainty on Government
Borrowing Costs, Employment Growth, and
role of monetary policy 8
1.3 The Economic Aspects Covered in Our Earlier Research 9
1.3.1 Income Inequality 9
1.3.2 Fiscal Policy, Labour Markets, Income Inequality,
Minimum Wage, and Poverty 9
1.3.3 Income Inequality and Employment Issues 9
1.3.4 The Distributive Effects of Fuel Levies, Public
Transport Infation, and Their Impact on
Infation Rates 10
1.3.5 Government Spending and Revenue Shocks 10
1.3.6 Budget Allocation and State Capture-Related
Activities 10
Reference 10
2 Synopsis of Fiscal Policy in South Africa: 1994–2020 11
2.1 Introduction 11
2.2 What Do the Last 34 Years Suggest About the Fiscal
Policy Framework? 13
2.2.1 The Government Debt Trends 13
2.2.2 Developments in Revenue 15
2.3 Did the Fiscal Policy Framework Perform as Expected
in Supporting South Africa to Absorb Unexpected
Asymmetric Shocks? 16
2.4 Did the Countercyclical Fiscal Policy Implemented
in 2009 Perform as Expected? 19
2.5 Conclusion and Policy Implications 21
Reference 22
Part I Effect of Government Debt Dynamics 23
3 Effects of Government Debt on Output, Household
Consumption, and Gross Fixed Capital Formation:
Role of the Credit Conditions Channel 25
3.1 Introduction 25
3.2 Theory on the Link Between Credit Conditions and
Government Debt 30
3.3 Model 31
3.4 Trends Analysis 32
3.4.1 The Interaction Between Government
Debt and Credit Conditions 35
3.4.2 The Role of Credit Conditions in Transmitting
Positive Government Debt Shocks to Output,
Household Consumption, and Investment 36
3.4.3 Disentangling the Effects of Government Debt
Ratio and Credit Conditions on Real Variables 38
3.4.4 Forecast Error Variance Decompositions 40
3.5 Conclusion and Policy Implications 42
References 43
4 Government Debt and Household Consumption: The
Infuence of the Wealth Channel 45
4.1 Introduction 45
4.2 The Link Between Government Debt-to-GDP Ratio,
Consumption, Credit Conditions, and Wealth 48
4.3 The Model 50
4.4 Data 51
4.5 Empirical Results 52
4.5.1 Forecast Error Variance Decompositions 54
4.6 The Role of Household Balance Sheet in Transmitting
Positive Government Debt Shocks to Household
Consumption 57
4.7 Conclusion and Policy Implications 58
References 59
5 Government Debt and Capital Formation Nexus in South
Africa: The Role of the Debt Threshold 61
5.1 Introduction 61
5.2 Theory 64
5.3 Methodology 65
5.4 Data and Stylised Facts 67
5.4.1 Cross Correlation and Correlations 68
5.5 Results 68
5.6 Evidence from Robustness Testing 70
5.7 Further Robustness Testing 72
5.8 Conclusion and Policy Implications 73
Appendix 74
References 75
6 Government Debt and Fixed Capital Formation Nexus:
Effects of the Interest Rate and Monetary Policy
Credibility Channels 77
6.1 Introduction 77
6.2 Do Government Debt Shocks Affect Gross Fixed Capital
Formation Asymmetrically? 80
6.3 VAR Modelling 82
6.3.1 Forecast Variance Decompositions 84
6.3.2 Historical Decompositions 86
6.4 Counterfactual Analysis 87
6.4.1 The Role of the Interest Rate Channel 87
6.4.2 Does Monetary Policy Credibility Matter? 88
6.5 Conclusion and Policy Implications 89
References 90
7 Infation Targeting Band, the Government Debt, and
Capital Formation Nexus in South Africa 93
7.1 Introduction 93
7.2 Theory and Why Infation Thresholds Matter 96
7.3 Data 97
7.4 Methodology 98
7.5 Results 101
7.6 A Counterfactual VAR Perspective 103
7.7 The Role of the Infation Expectations Channel 105
7.8 Conclusion and Policy Implications 106
References 106
8 Do High Government Debt-to-GDP Regimes
Propagate the Adverse Macroeconomic Effects
of High Budget Defcit Regimes? 109
8.1 Introduction 109
8.2 How Selected Macroeconomic Variables Respond to the
Government Debt Regimes? 112
8.3 How Robust Are the Responses of Selected Macroeconomic
Variables to the Government Debt Regimes? 113
8.4 Does the High Debt-to-GDP Channel Propagate the
Macroeconomic Effects of High Budget Defcit Regimes? 115
8.5 Conclusion and Policy Implications 117
References 118
9 Government Debt-to-GDP Ratio, Investment Growth
and Employment Growth, and Their Response to High
Nominal GDP Growth Regimes 119
9.1 Introduction 119
9.2 How Does the Debt-to-GDP Ratio Respond to Positive
NGDP Growth Shocks? 121
9.3 Responses of Investment Growth and Employment
Growth to Positive NGDP Shocks 122
9.4 Effects of Positive Shocks in the High and Low NGDP
Growth Regimes on the Debt-to-GDP Ratio 123
9.5 Conclusion and Policy Implications 124
Reference 126
10 The Impact of the Government Debt-to-GDP Ratio on
Investment Growth 127
10.1 Introduction 127
10.2 Responses of Real GDP Growth, Employment Growth,
and Investment Growth to Positive Debt-to-GDP Shocks 128
10.3 Private and Public Sector Employment Results 129
10.4 Responses to Persistent and Non-persistent Positive
Debt-to-GDP Shocks 131
10.5 Responses of Real GDP Growth, Employment Growth,
and Investment Growth to Shocks in Low and High
Debt-to-GDP Regimes 131
10.6 Conclusion and Policy Implications 133
Reference 134
Part II The Effects of Fiscal Budget Balance Defcits
Dynamics 135
11 Budget Balance Defcit Thresholds and Their
Macroeconomic Impact 137
11.1 Introduction 137
11.2 How Do Government Bond Yields, Output Growth,
and Employment Growth Respond to Positive
Shocks to the Budget Defcit? 139
11.3 How Robust Are the Results to Changes to Model Size
and Specifcation? 140
11.4 Infation Responses Due to an Unexpected Rise in the
Budget Defcit 141
11.5 Do High and Low Budget Defcit Regimes Exert
Different Effects on Various Macroeconomic Variables? 143
11.6 Conclusion and Policy Implications 146
References 147
12 The Impact of a Persistent Increase in the Budget Defcit
on Real Interest Rates 149
12.1 Introduction 149
12.2 How Does a Persistent Increase in the Budget Defcit
Impact Real Rates and Other Macroeconomic Variables? 151
12.3 Are the Results Robust to Changes in the Model Technique? 152
12.4 Are There Real Economic Activity Asymmetric Responses
Due to Shocks That Arise in Low and High Budget Defcit
Regimes? 153
12.5 Do High Budget Defcit Regimes Propagate the
Negative Effects of Infationary Pressures? 154
12.6 Conclusion and Policy Implications 155
Reference 155
13 What Are the Effects of Budget Balance Defcit
Regimes on Infation and Infation Expectations? 157
13.1 Introduction 157
13.2 How Do Infation and Infation Expectations
Respond to Positive Budget Defcit Shocks? 158
13.3 Do Budget Defcit Regimes Matter for Infation and
Infation Expectations? 159
13.4 What Are the Effects of Persistent and Non-persistent
Budget Defcit Shocks on Infation and Infation
Expectations? 161
13.5 Conclusion and Policy Implications 163
References 163
Part III The Effects of Interest Rates and Debt Service
Cost of Government Debt 165
14 Widening Budget Defcits and Investment Growth
Dynamics 167
14.1 Introduction 167
14.2 How Does Investment Growth Respond to Positive
Budget Defcit Shocks? 169
14.3 Are the Results Affected by the Inclusion of the
Interest Rate Channel? 170
14.4 Does the Inclusion of the Business and Consumer
Confdence Indices Change the Results? 171
14.5 Does the Interest Rate Channel Amplify the Impact
of the Positive Budget Defcit Shocks? 172
14.6 What Role Do the Business and Consumer Confdence
Channels Play in the Amplifcation of the Positive
Budget Defcit Shocks? 173
14.7 Conclusion and Policy Implications 173
References 175
15 Do High Government Debt Service Costs Reduce the
Potency of Accommodative Fiscal Policy in South Africa? 177
15.1 Introduction 177
15.2 What Explains the Different Trends in the Interest
Payments Observed Between South Africa and the
Advanced Economies? 182
15.3 Brief Literature on Fiscal Multipliers 184
15.3.1 What Factors Infuence the Size of Fiscal
Multipliers? 184
15.4 Stylised Facts 185
15.5 Does the Increase in Interest Payments to Nominal
GDP Ratio Explain Signifcant Changes in the
Fiscal Multipliers in South Africa? 190
15.6 Robustness Analysis Using the Endogenous-Exogenous
VAR Approach 191
15.7 Does the Tight Monetary Policy Stance Dampen the
Impact of Fiscal Expansions on GDP Growth,
Employment Growth, and the Unemployment Rate? 193
15.8 Conclusions and Policy Recommendations 196
Appendix 198
References 198
16 What Are the Macroeconomic Effects of a Positive
Interest Rate-GDP Growth Differential Shock? 201
16.1 Introduction 201
16.2 What Is the Importance and Signifcance of the
Interest Rate-GDP Growth Differentials? 204
16.3 What Are the Macroeconomic Effects of Positive Shocks
to the Interest Rate-GDP Growth Differential? 205
16.4 Robustness Analysis 206
16.5 Do Positive and Negative Interest Rate-GDP Growth
Differential Regimes Exert Different Macroeconomic
Effects? 207
16.6 Conclusion and Policy Implications 210
References 211
Part IV Macroeconomic Effects of Economic Policy
Uncertainty on Government Borrowing Costs,
Employment Growth and the Role of Monetary
Policy 213
17 Economic Policy Uncertainty and the Employment
Dynamics in South Africa Under the Infation
Targeting Regime 215
17.1 Introduction 215
17.2 Should Policymakers Care About the Effects of the
Economic Policy Uncertainty on Employment
Dynamics in South Africa? 217
17.3 Is there a Shift in Employment Shares Between the
Private and Public Sectors to Positive
Uncertainty Shocks? 219
17.4 Conclusion and Policy Implications 220
References 220
18 Economic Policy Uncertainty, Employment Dynamics,
and Price Stability in South Africa 221
18.1 Introduction 221
18.2 Theory 224
18.3 VAR Methodology 225
18.3.1 VAR Model 225
18.4 Data 226
18.5 Results and Discussions 227
18.5.1 The Counterfactual View of the Monetary
Policy Channel 228
18.6 Conclusion and Policy Implications 231
References 231
19 The Role of Economic and Policy Uncertainty on the
Effects of Widening Budget Defcits on Yields and the
Credit Default Swap Spreads 233
19.1 Introduction 233
19.2 What Are the Effects of Economic and Policy Uncertainty
on Yields and Credit Default Swap Spreads? 235
19.3 Does Economic and Policy Uncertainty Propagate the
Effects of Widening Budget Defcits on Ten-Year Yields
and the Credit Default Swap Spreads? 236
19.4 Do CDS Spreads and Ten-Year Yields Respond
Asymmetrically to Positive Budget Defcit Shocks? 238
19.5 How Do CDS Spreads and Ten-Year Yields Respond to
Transitory and Persistent Positive Budget Defcit Shocks? 239
19.6 Conclusion and Policy Implications 239
References 241
20 Summary of Main Findings and Policy Implications 243
Index 251