Modelling the asymmetric effects of interest rate shocks on credit supply and aggregate demand: evidence from South Africa.

Abstract

Monetary policy is a key component of the complete set of any country’s economic policy. Thus, it focuses on the welfare of people and aims to enhance the financial and overall wellbeing of the nation. However, understanding how monetary policy is transmitted (or its pass-through) is crucial as it reflects the policy’s effectiveness in achieving its goals. Given that South Africa has faced at least a decade of sluggish economic growth, leading to persistent unemployment, inequality and poverty, the country needs enhanced economic growth. The primary aim of the study is to model the asymmetric effects of interest rate shocks on credit supply and aggregate demand in South Africa. This study therefore investigates interest rate pass-through from monetary policy to both credit supply and aggregate demand. To achieve this, the study uses the non-linear autoregressive distributed lag (NARDL) model, the study examines the asymmetric reactions of credit supply and aggregate demand to South African monetary policy shocks, using both monthly and quarterly data from 2016 to 2023. The results indicate that pass-through of monetary policy to credit supply and aggregate demand in South Africa is both incomplete and asymmetric. Decreases in the repo rate have a more significant effect on both credit supply and aggregate demand than increases in the repo rate. Including asymmetric components into the administration of monetary policy could assist in fostering a more efficient policy response.