Essays on macroprudential policy and financial stability : the case of South Africa

Molise, Thabang Ernest (2020-03)

Thesis (PhD)--Stellenbosch University, 2020.


ENGLISH ABSTRACT : This thesis contributes to the literature on macroprudential policies for the South African economy. The main goal of the thesis is to enhance our understanding on how macroprudential policies work, their effectiveness, transmission channels and their interaction with the monetary policy. The thesis consists of three main chapters. Chapter 2 develops a real business cycle dynamic stochastic general equilibrium (DSGE) model that features a stylised banking sector, a housing market and a role of a macroprudential policy, and examines the extent to which the Basel III bank capital regulation attenuates fluctuations in housing and credit markets and fosters financial and macroeconomic stability. Secondly, we compare the effectiveness of four different Basel III countercyclical capital requirement (CcCR) rules in terms of enhancing financial and macroeconomic stability. The results show that the rule-based Basel III CcCR effectively attenuates fluctuations in credit and housing markets and mitigates the procyclicality of the Basel II capital regulation. The impact of a permanent increase in capital requirement ratio (a 2.5% conservation capital buffer) is marginal. The comparative assessment of the four Basel III CcCR rules suggests that the most effective policy rule is the one in which the authority adjusts bank capital requirement ratio to credit and output gaps. Chapter 3 investigates the implications of the countercyclical loan-to-value (CcLTV) regulation in a setting where household and non-financial corporate borrowers co-exist. To do this, we consider two policy regimes - one generic and one sector-specific. The results suggest that both the generic and the sector-specific regimes are effective in enhancing financial and macroeconomic stability. A comparative effectiveness of the two policy regimes is shock dependent. The effectiveness of the two policy regimes is more or less the same when the economy faces a technology shock. However, the sector-specific regime outperforms the generic regime when one sector of the credit market is hit by a financial shock. On the contrary, the generic regime outperforms the sector-specific regime when the economy is hit by a housing demand shock that has similar spillover effects on household and corporate credit markets. Chapter 4 develops and estimates a new Keynesian DSGE model, which features a stylised banking sector, a housing market and the role of monetary and macroprudential policies. The estimated model is then used to compare the effectiveness of a simultaneous deployment of monetary and macroprudential policies under the two alternative policy regimes against a benchmark regime in which there is only monetary policy. The first alternative regime is a combination of a standard monetary policy rule (Taylor rule) and a macroprudential policy rule, which is exemplified by a CcCR rule. The second alternative regime is a combination of an augmented monetary policy rule (an augmented Taylor rule), where the policy rate also reacts to credit growth, and a CcCR rule. The results suggest that a policy regime that combines a standard monetary policy and a macroprudential policy delivers a more stable economic system with price and financial stability. A policy regime that combines an augmented monetary policy and macroprudential policy is superior in enhancing financial stability, but compromises price stability.

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