Monetary policy in a commodity based economy: The case of South Africa

Monetary economics is a well-researched discipline. However, fewer studies used multi-equation models that included both monetary and real sectors of the economy. A well-specified multi-equation model for South Africa is the focus of this study. The South African Reserve Bank has over the decades sought of better monetary policy mechanisms relevant to the South African economy. Hence, there have been many changes by the Bank over the years as the authorities responded to changing economic conditions. The Reserve Bank was not immune from socio-political issues facing the country. A classic example was how it responded to economic sanctions applied against South Africa.;South Africa has been a commodity-based economy. For decades it led the world in the production of gold, and it played a major role in the production of other minerals. Hence, investments in the mining industry were of great importance. The industry was a backbone for the economy. Therefore, it matters that the Reserve Bank should pursue policies that would include encouraging growth in the mining sector.;The approach of this study is using cointegration in a multi-equations model that includes both monetary and real sectors of the economy. Real consumption and real investment equations will be the real sector part of the model whereas the monetary sector will be represented by the money demand and money supply equations. The inclusion of the money supply vector in the model brings with it the monetary base variable---which is important for policy makers.;The biggest single change in ways that the South African Reserve Bank conducted monetary policy was a switch from non-market to market oriented policy instruments. So, this study analyses the effectiveness of monetary policy under the two regimes---the non-market and the market approaches.;The robustness of the estimated model is analyzed starting from tests for the number of vectors predicted by the theory, the speed of adjustment parameters, correlation coefficients and persistent profiles.