Monetary and fiscal policy spillover and coordination in the SACU area
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Date
2020-11
Authors
Ndlovu, Duduzile
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
Interest in economic and monetary integration among groups of countries has been rising over the last three decades, with growing international interest emanating from the successful setup and launch of the EMU and the euro as the common currency of the EMU. Full monetary integration, the key focus of this study, entails setting up a regional central bank that is responsible for the formulation and implementation of monetary and exchange rate policies, having a single currency, as well as having formal regional surveillance of domestic economic (fiscal and structural) policies of the member countries. The Southern African Customs Union (SACU) incorporates an incomplete and asymmetric monetary union, the Common Monetary Area (CMA) and its journey towards the formation of a complete monetary union would involve preparatory stages of harmonising and linking macroeconomic and financial policies, institutions, and rules and regulations of the potential member countries. Therefore, this study explores whether or not there is an economic, monetary and fiscal policy case for the SACU region to become a fully-fledged monetary union by investigating the nature and degree of policy spillover effects and policy coordination across the region. Through four articles, the study employed various econometric techniques, which include principal component analysis, Johansen cointegration techniques, Vector Error Correction modelling (VECM), Granger causality testing, Structural Vector Autoregressive (SVAR) modelling, the Diebold-Yilmaz (DY) spillover index, the Set-theoretic approach (STA), and policy reaction functions to address the objectives. The main contribution of the study is the conclusion about the structure of monetary and fiscal policy management to establish whether or not there is an economic, fiscal and monetary policy case for SACU countries to move towards full monetary integration, as embodied in a monetary union. The major finding of the study is that, while monetary policy spillovers and the spillover effects seen through testing the South African dominance hypothesis make a case for monetary integration and a monetary union, the lack of coordination between fiscal and monetary policy means that fiscal and monetary policy coordination first needs to improve before a move can be made to monetary integration and union. This is particularly important if we see the threat that the lack of such coordination in the euro area made towards the existence of the euro area.
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Keywords
Thesis (Ph.D. (Economics))--University of the Free State, 2020, SACU countries, Monetary policy spillovers, Fiscal policy spillovers, Monetary and fiscal policy coordination, Financial development spillovers, VECM, Set-theoretic approach, Policy reaction functions