The impact of United States interest rates on the South African economy (WP/26/12)

It first classifies movements in US interest rates based on their cause – that is, changes in inflation expectations (‘inflation’ shocks), changes in perceptions of the Federal Reserve’s reaction function (‘reaction’ shocks) and changes in real activity (‘real’ shocks). Policy tightening in the US prompted by reaction and inflation shocks have a material and adverse impact on financial developments in South Africa, with limited evidence of short-term macroeconomic and policy impacts. Real shocks, in contrast, have more benign impacts. These results are broadly similar to spillover impacts of other measures of US interest rate shocks identified in the literature. The paper also assesses the degree of asymmetry in spillover impacts when differentiating between positive (policy-tightening) and negative (policy-easing) shocks. Positive shocks – reflecting US policy tightening – tend to have larger impacts.