South Africa's real business cycles: The cycle is the trend

Hilary Patroba () and Leroi Raputsoane
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Hilary Patroba: Department of Economics, University of Stellenbosch

No 12/2016, Working Papers from Stellenbosch University, Department of Economics

Abstract: This paper tests the `cycle is the trend' hypothesis. We investigate how far permanent and transitory productivity shocks can account for the dynamics observed in the South African business cycle over the period 1946--2014. By estimating a standard small open economy real business cycle model and its financial frictions augmented counterpart, we show that permanent productivity shocks are more important than transitory ones in explaining this country's business cycle fluctuations. This finding supports the `cycle is the trend' hypothesis in the South African business cycle. The model with financial frictions successfully mimics the downward-sloping high autocorrelation of trade balance to output ratio observed in the data, whereas the benchmark model produces a flat autocorrelation function. Financial frictions such as country risk premium shocks help to explain the fluctuations in investment and in the trade balance to output ratio.

Keywords: Small open economy; real business cycle; permanent shock; transitory shock; financial frictions; Bayesian (search for similar items in EconPapers)
JEL-codes: E13 E32 F41 F44 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-ger, nep-mac and nep-opm
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