Journal of African Economies Advance Access published online on April 10, 2008
Journal of African Economies, doi:10.1093/jae/ejn005
IDENTIFYING AGGREGATE SUPPLY AND DEMAND SHOCKS IN SOUTH AFRICA
a Department of Economics, University of Stellenbosch, Stellenbosch, South Africa
b Kennedy School of Government, Harvard University, Cambridge, MA, USA
c Universidad Torcuato Di Tella, Buenos Aires, Argentina
* Corresponding author: Federico Sturzenegger, Kennedy School of Government, Harvard University, Cambridge, MA, USA. E-mail: Federico_Sturzenegger{at}ksg.harvard.edu
This paper uses a structural VAR methodology to identify aggregate demand and supply shocks to real output for the South African economy. Demand shocks, in turn, are separated into fiscal and monetary shocks. The model is estimated with quarterly data over two overlapping samples: 1960Q2–2006Q4 and 1983Q4–2006Q4. The identified (structural) shocks were used in a historical decomposition to split output into a measure of potential output (resulting from the evolution of supply shocks) and a measure of the business cycle (the gap between actual and potential output). This measure of potential output suggests a significant decline relative to trend in the years prior to the political transition of 1994 and a swift reversal thereafter. The paper presents evidence from three sources to support its identification of aggregate supply and demand shocks. These sources are the following: theory consistent impulse response functions; a close match between the implied measure of the business cycle and independent information about the South African business cycle and a demonstration of the close match between the identified series of aggregate supply shocks and important historical events in the decades prior to and following 1994 that have been identified by economic historians as important shocks to the South African economy.
JEL Classification: C25, C41, E32
1 We thank participants at a University of Stellenbosch retreat which took place in January 2007. This research is part of the joint initiative of the South African government and Harvard University to unveil the constraints on the growth process in South Africa. The authors would like to thank Pablo Gluzman for his invaluable research assistance.