Volume 2

C E N T R A L B A N K O F S WA Z I L A N D | RESEARCH BULLETIN VOLUME 2
CENTRAL BANK
OF SWAZILAND
RESEARCH BULLETIN
VOLUME 2
ECONOMIC POLICY, RESEARCH AND

STATISTICS DEPARTMENT
MARCH, 2018 Central Bank Of Swaziland © 2018

i
ii Central Bank Of Swaziland © 2018

CENTRAL BANK OF SWAZILAND
RESEARCH BULLETIN
VOLUME 2
ECONOMIC POLICY, RESEARCH

AND STATISTICS DEPARTMENT
MARCH, 2018
Central Bank Of Swaziland © 2018

1
FOREWORD
The Central Bank of Swaziland welcomes you to yet another rendition of its Research
Bulletin. This publication forms part of the Bank’s endeavor to provide voice to research
work conducted within the institution. We hope that a reading of this document ignites new
discussions, revives unfinished deliberations and reorganizes existing policies in Swaziland.
Encompassed in this document is the research work that has been undertaken during the
2017/2018 financial year.
It has to be amplified that whilst care has been given to ensure accuracy in terms of
methodological application and use of analytical tools available, errors and omissions are
those of authors. As such should a reader identify such an error and/or an omission, please
forward these to the General Manager, Economic Policy Research and Statistics Department
who is reachable at sikhumbuzod@centralbank.org.sz. Further, each of the published
material contains contact details of the authors. Readers are encouraged to interact with
authors to enable the Bank to improve the quality of its research work.
Disclaimer: The ideas expressed in the papers should not be reported as representing the
views of the Central Bank of Swaziland. The views expressed in this papers are those of the
authors and do not necessarily represent those of the Central Bank of Swaziland and Central
Bank Policy.
2 Central Bank Of Swaziland © 2018

TABLE OF CONTENTS
Author(s) Topic Page
Patrick Ndzinisa and Determination of an Optimal Public Debt Threshold Level 4

Majozi Sithole for Economic Growth in Swaziland.
Simiso F. Mkhonta Discount Rate Differential Monetary Policy Decisions in 16

the CMA and Portfolio Investment Assets: The Efficacy
of Namibia and Swaziland Monetary Policy.
Bongani P. Dlamini An Assessment of the Impact of Fiscal policy on Output in 24

Swaziland: A Determination of the Size of Fiscal Multipliers
in Recessions and Expansions.
Sikhumbuzo S. Dlamini, The Efficacy and Potency or Paralysis of Monetary Policy 44

Ntobeko S. Dlamini in Swaziland under the Common Monetary Union.
and Sive Kunene
Sive Kunene and The Impact of Monetary Policy Changes on Macroeconomic 60

Thandeka Mdladla Variables in Swaziland: A special focus on Fiscal Variables.
Zana S. Mabuza and The Relationship between Household Debt and Economic 71
Ntobeko S. Dlamini Growth in Swaziland.
Bongani P. Dlamini Modelling and Forecasting Inflation Dynamics in Swaziland. 87
Welcome N. Nxumalo The Inflation Differential Between Swaziland And 108

South Africa – Revisited.
Ntobeko Dlamini Rand-Dollar Price Fixing Effect and Policy Recommendation. 122

3
Determination of an Optimal Public The estimated optimal debt limit is also in

Debt Threshold Level for Economic line with the SADC convergence criteria of
public debt as a percentage of GDP of less
Growth in Swaziland than 60 per cent. We recommend for debt-
management policies that will gradually
Patrick Ndzinisa1 and Majozi V. Sithole2 bring public debt towards the threshold
level to support growth while also ensuring
Abstract debt sustainability.
Key words: public debt threshold, economic

This paper determines an optimal public growth, GMM, Swaziland
debt threshold level above which increasing
debt reduces economic growth in Swaziland. 1.0 INTRODUCTION
Theoretical literature suggest that debt The paper empirically determines an
initially causes growth to rise by increasing optimal threshold level of the public debt
aggregate expenditure. However, as debt beyond which rising debt becomes deterrent
increases to unsustainable levels tends to economic growth in Swaziland. The
to reduce growth by reducing aggregate existence of an optimal public debt threshold
expenditure as resources are channeled implies a nonlinear quadratic relation
towards servicing debt. This suggests a between economic growth and public debt.
nonlinear relationship of a quadratic form As suggested by existing theoretical studies,
between debt and growth. As such, the the nonlinearity effect of debt to economic
study estimates an aggregate demand non- growth is most likely to be transmitted
linear quadratic threshold model including through the investment channel (Pattillo et
public debt. We control for the possibility of al., 2002). According to Palley (1994) and
endogeneity by employing the Generalized Athanassiou (2012) debt initially increases
Method of Moments (GMM) estimation growth by increasing aggregate expenditure.
technique. However, as debt becomes excessively high
it dampens growth as government revenue
The results confirm the existence of a is channeled towards servicing debt at the
nonlinear hump-shaped relation between expense of low aggregate expenditure.
public debt and economic growth. The This suggests that debt has two opposing
optimal level of public debt-to-GDP above effects on growth and that the relationship
which increasing debt reduces economic between the two variables is nonlinear of
growth is estimated at about 46 per cent the quadratic form.
of GDP. A retrospective examination of the
country’s total public debt-to-GDP profile The global economic meltdown prompted
indicates that the estimated threshold level many countries to pursue expansionary fiscal
policies to prevent their economies from
has not been exceeded in the past and not
collapsing. While these policies helped to
even the 35 per cent public debt limit set by
resuscitate growths, they led to high public
government and the 40 per cent proposed
debt-to-GDP ratios. This became evident in
by the World Bank for developing countries.
countries including Greece which recorded
a debt-to-GDP ratio of over 100 per cent
(Bawa et al., 2016). In Swaziland, the crisis
1
Patrick Ndzinisa is the Manager, Policy Research and led to a sharp fall in the Southern African
Macroeconomic Analysis in the Central Bank of Swaziland., Custom Union (SACU) revenue prompting a
reachable at PatrickN@Centralbank.org.sz
rapid increase in public debt particularly in
2
Majozi V. Sithole is the Governor of the Central Bank of
public domestic debt. Public domestic debt
Swaziland.,reachable at MajoziS@Centralbank.org.sz

increased from a low of 1.5 per cent of GDP (2011) argue that for high level of debt it is a
in 2009 to 10.0 per cent of GDP in 2016. As challenge to know if debt has reached levels
noted by Semmler and Sieveking (2000), an that are suppressing to growth. The debt
increase in debt above a critical level can threshold therefore provides a quantifiable
result to unsustainable debt and insolvency. level at which additional debt lowers
Consequently, creditworthiness may be growth by channeling resources to debt
lost leading to capital outflows causing a repayment. Unlike the critical debt ratios
currency and financial crisis and a huge set by the World Bank, the study determines
decline in output. a country-specific debt threshold supported
by econometric models. For example, the
Against this background, the purpose of this 40 per cent to GDP debt critical ratio for
study is to establish an optimal level of public developing countries may not be applicable
debt given the growth rate for Swaziland in Swaziland.
using both quantitative and qualitative
analysis. More specifically, the study intends To the best of our knowledge, no study has
to achieve the following objectives. Firstly, been done in relation to the determination
to ascertain if there is evidence in support of an optimal public debt threshold beyond
of a non-linear quadratic relationship which additional debt impedes economic
between the public debt-to-GDP ratio and growth in Swaziland. Unlike existing studies
growth in Swaziland. Secondly, to determine which investigate the relation between debt
the optimal debt-to-GDP ratio for Swaziland and growth within growth models, this study
above which increases in public debt has a examines this relation using the aggregate
negative effect on growth. Thirdly, to find out demand specification. In this regard, we
if there are significant differences between build on the work by Moron and Winkelried
the estimated optimal debt-to-GDP ratio (2005), who formulate an aggregate demand
for Swaziland and the 35 per cent of GDP function for Latin American countries. By
debt limit set by the Swaziland government adding the linear term and squared term
in its debt strategy3 and the 40 per cent of of the public debt-to-GDP to the aggregate
GDP4 debt limit set by the World Bank for demand equation, we formulate a non-linear
developing countries respectively. Lastly, debt-growth nexus. This formulation allows
we intend to verify if the estimated optimal us to investigate whether public debt has a
debt threshold is in line with the SADC debt positive short-run and a negative long-run
limit of less than 60 per cent of GDP. effects on economic growth.
The significance of the study is that the The remainder of the paper is organized as
public debt threshold will guide policy follows: In section 2, we review previous
makers in designing appropriate optimal related literature on the relationship
public debt strategies for the country. In this between public debt and economic growth,
regard, the debt threshold acts as a debt and on the determination of threshold
ceiling to ensure positive economic growth levels. Section 3 presents developments of
rates and debt sustainability. Pattillo et al. the public debt and growth in Swaziland
in relation to its counterparts in the
SACU region. In section 4, we present the
theoretical public debt threshold models.
Data analysis and the estimation technique
3
Source: Budget speech presented by the Minister of are presented in section 5. In section 6,
Finance, 21 February 2014 pp.27.
the empirical results are presented and
4
These debt-to-GDP ratios are based on the standard
analyzed. Section 7 concludes with some
critical value of debt ratios sourced from the World Bank,
World debt Tables: 1989 - 91.
policy recommendations.

5
2.0 LITERATURE REVIEW may imply higher sovereign yield spreads.

The global recession and sovereign debt This according to Laubach (2009) could lead
crisis in Europe have intensified studies to higher real interest rate, hence lowering
on the relationship between debt and private investment and growth.
economic growth. As noted by Eberhardt and
Presbitero (2015), many studies examine this The nonlinear relationship between debt
relationship by investigating the possibility and growth can also be theoretically
of a nonlinear debt-growth nexus; and the motivated from the demand side of the
extent to which debt accumulation has a economy. As noted by Palley (1994), a
short-run positive and a long-run negative rise in debt initially increases aggregate
effects on economic growth. In this regard, demand leading to output growth. However,
a strand of literature concludes that there as debt accumulation becomes excessive
is a nonlinear effect of debt on economic debt service burden increases which in turn
growth. These studies further argue that reduces aggregate demand and therefore
debt initially promotes growth and that hampering output growth. Alternatively,
higher debt levels beyond a threshold the increased aggregate demand causes
level tend to significantly and negatively the interest rate to rise putting pressure on
affect growth in the long-run. The general output to fall. Similarly, Athanassiou (2012)
theoretical assumption is that the impact on argues that debt has an expansionary effect
economic growth is positive at low levels of on aggregate demand emanating from the
public debt, and that beyond a certain debt increase in the debt and a contractionary
level a negative effect on growth prevails. effect resulting from the debt service on
outstanding and new debts. The nonlinear
Many studies examine the relationship aggregate demand relationship between
between public debt and growth by debt and growth can be explored by
augmenting the standard overlapping augmenting the aggregate demand function
generation models of growth (Blanchard, proposed by Morón and Winkelried (2005)
1985) and the endogenous growth models with public debt.
(Saint-Paul, 1992) with public debt. The
positive short-run effects of debt on growth Turning to empirics, amongst the authors that
is supported by Keynesian economists who have investigated the relationship between
argue that the accumulation of public debt public debt and economic growth is Reinhart
induced by a fiscal deficit will improve the and Rogoff (2010). Using simple descriptive
level of income, the transaction demand for statistics, they find that an increase in the
money and prices, all of which will enhance public debt-to-GDP ratio to above 90 per
economic growth. In line with this theory, cent has a negative effect on growth for
Bakar and Hassan (2008) and Cohen (1991) advanced and emerging economies. This
have found a significant positive relationship result is later confirmed by econometric
between debt and economic growth. studies by Cecchetti et al. (2011) and
Padoan et al. (2012) for OECD countries; and
On the other hand, Checherita and Rother Checherita and Rother (2012) and Baum et
(2010) argue that public debt negatively al. (2013) for euro area countries. Employing
affects growth in the long-run through the an instrumental variable approach, Mupunga
long-term interest rates channel. As such, and le Roux (2015) find an optimal growth-
higher long-term interest rates, prompted maximising public debt threshold of between
by increased public debt to finance fiscal 45 and 50 per cent for Zimbabwe. The result
deficits, can crowd-out private investment, confirms the existence of a nonlinear hump-
leading to low output growth. Codogno et shaped relationship between public debt
al. (2003) also note that higher public debt and economic growth in Zimbabwe.

Pattillo et al. (2011) use a quadratic region, Swaziland’s public debt as percentage
function to examine the nonlinear linkage of GDP remains low over the period 2006
between public external debt and growth to 2016. The current debt-to-GDP ratio is
for 93 developing countries. Their findings about 20 per cent and below the 35 per cent
confirm the existence of a nonlinear and a limit set by government. The debt limit set
hump-shaped relationship between debt by government is within the convergence
and growth. The results indicate debt-to- criteria set by SADC, which stipulates a
GDP threshold levels ranging from 35 to public debt as percentage of GDP of less than
40 per cent for these countries. Similarly, 60 per cent. Over the period under review,
Wright and Grenade (2014) examine the Swaziland’s public debt averaged 14 per
relationship between public debt and growth cent of GDP. This is lower than the averages
and the nonlinearity issue using panel of 15 per cent recorded in Botswana, 42 per
dynamic OLS and threshold dynamics in 13 cent in Lesotho, 24 per cent in Namibia and
Caribbean countries. Their findings indicate 38 per cent in South Africa. For Swaziland,
that beyond the debt-to-GDP ratio of 61 per public debt started growing at a faster pace
cent, debt negatively affects investment during and after the global financial crisis.
and economic growth. For Nigeria, Bawa et This was due to the crisis induced decline in
al. (2016) find a total public debt-to-GDP SACU revenue, which was reflected in trends
ratio of 73.7 per cent, an external debt ratio in fiscal deficits.
of 49.4 per cent and a domestic debt ratio of
30.9 per cent above which growth begins to As shown in Table 1b economic growth in
fall, respectively. Swaziland considerably slowed down in 2008
to 0.8 per cent. On average, Swaziland’s
3.0 PUBLIC DEBT AND ECONOMIC economic growth remains relatively low at
GROWTH IN SWAZILAND 3.4 per cent compared to 4.6 per cent in
Tables 1a and 1b show SACU revenue growth Botswana, 4.5 per cent in Lesotho and 4.7
rates, GDP growth rates and public debts per cent in Namibia over the period under
as percentage of GDP in SACU countries. review.
Compared to its counterparts in the SACU
Table 1a: SACU Revenue Growth (SR), GDP Growth (GDP) and Public Debt as % of GDP (PD) in
SACU Countries 2006-2016
Botswana Lesotho Namibia
SR GDP PD SR GDP PD SR GDP PD
2006 107 8.4 6.2 112 4.2 54 167 7.1 24
2007 8.3 8.3 8.3 -2.6 4.8 50 -23 6.6 19
2008 5.2 6.2 7.7 20 6.7 44 28 2.6 18
2009 -30 -7.7 18 -27 2.2 33 -28 0.3 16
2010 -14 8.6 19 -39 6.5 30 -16 6.0 16
2011 58 6.0 20 27 6.6 32 39 5.1 23
2012 71 4.5 19 117 5.9 36 93 5.1 24
2013 0.3 11.3 17 1.5 2.2 38 6.7 5.7 24
2014 26 4.1 17 18 2.3 43 25 6.5 25
2015 4.0 -1.7 16 -11 5.6 50 -6.6 5.3 38
2016 15 2.9 14 -2.4 2.5 48 14 1.2 41
Avg. 23 4.6 15 19 4.5 42 27 4.7 24
Sources: Central banks of SACU members and Swaziland Revenue Authority

7
Research Bulletin Volume 2
limited
C E N T R A L B A N K O F S WA Z I L A ND | expenditure
R E S E A R C adjustments
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Table 1b: SACU Revenue Growth (SR), GDP Growth (GDP)
recorded and
prior to Public Debt
the global as % ofcrisis
financial GDP (PD)
to economic gr
in SACU Countries 2006-2016 register high deficits in 2009 and 2010 in line during and af
RSA Swaziland
with a significant decline in SACU revenues. The
SR GDP PD SR GDP PD DD 4 Theoretica
situation was further exacerbated by Swaziland's
2006 41 5.6 26 105 6.0 16 2.6 To determine
failure to secure international funding to close the
2007 16 5.4 24 -13 4.4 18 2.0
between pub
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2015 4.8 1.3 49 -10 1.9 15 5.9 Proano et al.
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Sources: Central banks of SACU members and Swaziland Revenue
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′ explanatory 𝑡𝑡to 𝜀𝜀is whether
above
(1) variable or
lpublicBank of Swaziland
debt andvalue. growth
rise, d©is 2018
hence a dummy
using threshold
crowding
5
variable that50the
out assumes𝑡𝑡 =private 𝛼𝛼0 +
can be and 𝑥𝑥𝑡𝑡 +
represented 𝛼𝛼
can 𝛼𝛼be 2 𝑑𝑑(𝑥𝑥 as𝑡𝑡follows:
represented − 𝑘𝑘) + allows 0𝑍𝑍 𝑡𝑡 +the
follows: 𝑡𝑡nonlinearexistence
perdomestic cent ofvalue.
GDP
to
markets almost
in 2011/12.
caused 13 per
suppliers the Without
cent lending
in of
time. GDP rates
The in 2011/12.
to
fiscal deficit ∗sector.
Without
also 1increasedThe threshold type (2 m
Per cent
higher
ntral term
Bank with
15
ofa 𝑑𝑑zero
Swaziland
value -5
is is2011
aof mean
dummy
specified
one © due and
2018
for as to
variable a
observed
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follows: that
Bank government's
assumes
values
of variance.
Swaziland of
can
a
be
value
the © below
represented
inability
2018Fig. 𝑥𝑥contains
2. A a
quadraticthreshold
as
= to paycontrol explanatory follows: relation value.
corresponding
between This 𝑦𝑦 and framewo
variables
𝑥𝑥 ( 4vector
)
ments to expenditure to match 0 the declined 0
below 1, 𝑖𝑖𝑖𝑖
aFigure (𝑥𝑥2𝛼𝛼
threshold 𝑡𝑡 > 2 𝑘𝑘) value. below according
This -5 to whether
s. The general empirical threshold model theabetween framework
threshold ofvalu
has
2008 2012
2009 2013
2010 2014
2011 2015
cent 2016
a hencegexpenditure
e Estimating 10threshold
increase variable into the P greater
almost a g e 13 than
borrowing per cent
𝑑𝑑 the
= costs {of GDP
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quadratic
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pr
o
rowing crowding adjustments
to -10
eq. match
out (1) the the
to
repeatedly expenditure
declined
private withsector. to
different match
The the declined
2010
2006
2007
2008
2009
2011
2012
2013
2014
2015
2016
of one for suppliers

observed in time.
values
-5 Theof fiscal
the -50 threshold deficit
0, been
also applied
increased
corresponding
𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 in a number explanatory
vector -10 of of studies. variables.
coefficient For in
ed e flows,
as follows: public
5 threshold debt, 𝑦𝑦𝑡𝑡 =particularly
level values
𝛼𝛼 0 + 𝛼𝛼1and 𝑥𝑥𝑡𝑡 +zero 𝛼𝛼2domestic
𝑑𝑑(𝑥𝑥otherwise.
𝑡𝑡 − 𝑘𝑘) + 𝛽𝛽 Central
′
𝑍𝑍Graphically
𝑡𝑡 + 𝜀𝜀y and
𝑡𝑡 Bank (1) xofthe Swaziland above ©relation 2018below between awhether threshold𝑦𝑦𝑡𝑡 and 𝑥𝑥𝑡𝑡val
adjustments to threshold -100 been
expenditure P a to
applied ematch
in a declined
1, number 𝑖𝑖𝑖𝑖 been
(𝑥𝑥
according of𝑡𝑡 studies.
> applied
𝑘𝑘) to For in instancea numbe public
{the
-15
Per2012
2013
2014
2015
2016
sector. values variable of 𝑘𝑘, greater

chosen in
than ascending
the -10given order, Central
thelevel gBank 𝑑𝑑 of Swaziland
=Without © 2018 -15
s,ease public in the debt,
0is revenue particularly
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contains
costsWhere public
domestic
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Swaziland
coupled cent
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𝑦𝑦 debt, of
is© GDPparticularly
2018
explanatory
withthe in
the 2011/12.
dependent Proano domestic et
variable, al. (2014) 𝑥𝑥 is estimate the } a threshold
ose on the
P a g can
e be explanatory
represented 0, Deficit/surplus asvariables.
follows:
𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝑡𝑡 asbeen 𝑡𝑡 is a random
𝜀𝜀applied Where invalue.
a numbe 𝑦𝑦𝑡𝑡dii
𝑡𝑡back 𝑘𝑘𝛽𝛽of high fiscal 𝑡𝑡 deficits.
g0Deficit/surplus
+
from𝛼𝛼1 𝑥𝑥 𝑡𝑡 + 𝛼𝛼
optimal values
as
2-5𝑑𝑑(𝑥𝑥
%−aGDP
variables.
P
value and gofe+zero
𝑘𝑘) ′
is𝑍𝑍is +the
obtained 𝜀𝜀𝑡𝑡 corresponding
revenue
𝑡𝑡 otherwise. (1) by
-15 finding
flows,
𝑍𝑍 is public
a thevector
vector
SACU Growth
Proano
value debt,
whichof particularlyet
rate
al. (2014) domestic estimate below Proano
%aGDP
a threshold
threshold
et al. (2014) level esti Th
of
nral the
Bankback debtof high adjustments
rose fiscal
on the to expenditure
deficits.
1, 𝑡𝑡Source: SACU Member
back 𝑖𝑖𝑖𝑖 of (𝑥𝑥 high to> match
𝑘𝑘) fiscal
States the declined
deficits.
coefficients
of Swaziland © of
2018 the explanatory variables. the debt-to-GDP ratio beyond which threshold a rise v
2013
2014
2015
2016
ates
tic
th to
ratedebt
-10
that minimizes
continued
contains the residual
control
Deficit/surplus rising
debt
threshold
explanatory
as %
𝑑𝑑sum= { of squares
since
rose
GDP 0, on 2010variable
the
variables. Where 𝑡𝑡
(RSS).
back to 𝛽𝛽
𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 ′ and
is
}𝑦𝑦𝑡𝑡 is𝑘𝑘𝑦𝑦the
of
the high
isfiscal adependent
given
deficits.
threshold
been Proanoin
variable,
applied et𝑥𝑥 a al.
𝑡𝑡number
(2014)
is theofest st
e ε
-15
t is a random disturbance
revenue flows, public term
Mafusire debt,the
with zero debt-to-GDP
particularly
(2015) further domestic notesratiothat beyond the
©the
debt-to-GDP
which a rise
higher value.
ratio
in𝑑𝑑debt is
be a
bt
or.es ates continued
Thethat 1, the Domestic
𝑖𝑖𝑖𝑖
mean
𝑑𝑑 = {as % corresponding
rising
higher (𝑥𝑥
and > 𝑘𝑘)
a
Where}vector
𝑡𝑡 since
debt
constant
𝑦𝑦𝑡𝑡value.
Domestic is the2010
continued
variance.
of 𝑑𝑑dependentis to a
coefficients
debt
rising
Estimating
dummy
threshold
continued of variable
variable, since
Central
the risingreduces
variable
𝑥𝑥 2010
Bank
𝑡𝑡e is since that
the
of to
Swaziland
output
assumes
and
2010 𝑘𝑘to growth.
is
Proano
2018
a a the
value given
et debt-to-GDP
al. Similarly,
(2014) threshold ratio
estimate Wrig be
r 10 per
cit/surplus
0, cent
GDP
eq.in 2016. debt rosewith
𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
(1) repeatedly on different
theinterest back values ofreduces
costs high P a
of k,associated
g
fiscal output deficits. with growth. high reduces Similarly,
borrowing output Wright growth and
ith the
r further
cent in 2016. register 10 per cent in 2016. reduces output of one growth for
th is high
the
However,borrowing
notes
explanatory
chosen
dependent
some that
in studies
threshold
ascending
variable, the
variables. employ
of
register
𝑥𝑥
variable
higher
𝜀𝜀 one
order,
is𝑡𝑡 is 10
the
a quadratic
and
random
the
per for 𝑘𝑘
optimal
cent is model
observed
value.in a
disturbance given
value
2016.𝑑𝑑 is threshold
Grenade
avalues
dummy of (2014)
variablethe the
thresholdthat examine
debt-to-GDP assumes ratiothe
a valuebeyond relat
𝑡𝑡 Domestic 𝑡𝑡 debt continued requirements rising 9 | spilled
sinceover 2010 into tothe private sector.
1:thatFiscal the higher
to obtain of the
Balances k isthresholdobtained
value.
and 𝑑𝑑
SACU abydummy
islevel. finding
For example,
Revenue theGrowth
variable valuethatGrenade
Pattillo that
assumes a value(2014) examine Grenade Grenade the (2014) relationship
variableexa
(2014) gre
exa
odssociatedthe private with sector.
ishigh borrowing between public reduces
debt and output growth. Sim
lhigh
variable
Balances
and 𝑘𝑘
minimizes a giventhe
register threshold
variable
residual
10 per sumcent ofgreater
The squares
invalues of SACU
2016.
increase than
oneand
(RSS). for
inRevenue the
the given
observed
government threshold values
borrowing level
of from the threshold th
growth using
et al. and
borrowing Figure
(2011) SACU of 1:one
examine Fiscal
Revenue fora Balances
Figure 1:Growth
observed
nonlinear Fiscal and
Balances
and hump- of the
between public debt and
SACU
threshold Growth
Revenue Growth
between between
growth(2014) using
public public values
threshold
debt debt and an
and
ent s a dummy variable
borrowing fromthat assumes Rates a value Grenade examine
lled
e private over into
sector. Rates
However, the private
some1:studies sector.
values and thethe zero
avariable
domestic otherwise.
markets dynamics.
greater 𝑍𝑍Growth
caused𝑡𝑡than is The a the
the vector general
lending given which
rates empirical
thresholdto The threshold
level
shaped linkagevariable between
Figure Fiscal employ
greater
external thandebt
Balances and quadratic
given
andgrowth SACU threshold Revenue level dynamics. 𝑥𝑥contains general coe
for observed model valuesto ofobtain the threshold the threshold level. dynamics. For The general 𝑥𝑥 empirical
∗
betweendynamics. public thresholdThe debt general
and mode grow e
the
00he
borrowing lending
government
by using from rates
a quadratic to
borrowing
Rates
values and zero
contains
function from
et200 rise,
otherwise.
al.model. control hence
The
15
𝑍𝑍
values 𝑡𝑡 non- is crowding
a vector
explanatory
and zero is specified
outotherwise.
which the private
variables. as follows:
15 ′
sector.
𝑍𝑍𝑡𝑡isis
𝛽𝛽 isthe aThe
specifiedvectoras which
correspondi
follows:
greater than example, the given 200Pattillo
threshold level 15(2011) examine ∗ 15 dynamics. The general empiri
50 lending rates a to nonlinear contains and control hump-shaped
150 explanatory 10 is
linkage specified
variables. Where
𝛽𝛽 ′
is asthe follows:
𝑥𝑥 is the 10 threshold is specified level as
beyond follows: which
rkets
nd private linear
zerocaused sector.
otherwise. model the𝑍𝑍The assumes
lending
𝑡𝑡 150is a vector arates quadratic
200 corresponding
which to10 increase
form of
contains in the
the
vectorcontrol borrowingWhere
of𝑦𝑦 =coefficients x*costs
explanatory
1510
is coupled
the threshold with
of𝛼𝛼variables. the thelevel beyond ′
𝛽𝛽+explanatory
is𝑥𝑥′ 𝑍𝑍the
00vate sector. The between external debt 100 and growth 5by using increasing
which 𝛼𝛼
increasing 𝑥𝑥+ 𝛼𝛼
reduces 5 𝑥𝑥 is + specified
reduces 𝑦𝑦 . On 𝑑𝑑(𝑥𝑥𝑦𝑦the .= as −
On follows:
𝑘𝑘)
other
𝛼𝛼 the + 𝛼𝛼𝛽𝛽
hand,
other 1 𝑡𝑡 + 𝑡𝑡if+𝛼𝛼 𝑥𝑥𝑡𝑡2𝜀𝜀𝑑𝑑𝑡𝑡
2015 SACU Growth
following; corresponding vector of coefficients of 𝑡𝑡 the 0 𝑡𝑡 1 𝑡𝑡 𝑡𝑡 2 𝑡𝑡 𝑡𝑡 0

2010 Per cent
Per cent
a quadratic function
150 𝛽𝛽 ′ ismodel. Central
The Bank of Swaziland © 2018
non-linear ′
ts coupled
ding control out the with
explanatory private the sector.
variables.
100
explanatory the
The P a g evariables.
5
corresponding 𝑦𝑦𝑡𝑡 =𝜀𝜀 𝛼𝛼is is+
𝑡𝑡hand, a 𝛼𝛼 1 𝑥𝑥𝑡𝑡𝑥𝑥+
random
vector
if
105
the𝛼𝛼20disturbance
∗is below
of𝑑𝑑(𝑥𝑥x* − 𝑦𝑦𝑡𝑡𝑘𝑘)
𝑡𝑡coefficients
the =increase
+𝑥𝑥𝛼𝛼𝛽𝛽0 + 𝑍𝑍𝑡𝑡 in 𝛼𝛼+of 1 𝑥𝑥 𝜀𝜀𝑡𝑡 + isthe (1)𝛼𝛼to
2 𝑑𝑑(
SACU Growth
50 0 below increase in
50
coupled with the 0 𝑡𝑡 is expected
Per cent
Per cent
model explanatory
assumes 100 a variables.
quadratic 𝜀𝜀𝑡𝑡form of thedisturbance 5
is a random 𝑦𝑦𝑡𝑡 .= 𝛼𝛼0 + 𝛼𝛼1 𝑥𝑥𝑡𝑡 + 𝛼𝛼2 𝑑𝑑(𝑥𝑥𝑡𝑡 − 𝑘𝑘
nding vector of coefficients of 0the 0 expected to 0 increase
Growth
50 -5
cent
orrowing𝑦𝑦costs following; coupled 𝛼𝛼with

2 𝑥𝑥𝑡𝑡 + 𝛽𝛽the
0 2 ′ -5
(2) increase 𝑦𝑦 9|
𝑡𝑡 = 𝛼𝛼0 + 𝛼𝛼1 𝑥𝑥𝑡𝑡 + 50 𝑍𝑍𝑡𝑡 + 𝜀𝜀𝑡𝑡 explanatory variables. 𝜀𝜀 is a random
0𝑡𝑡 .
𝑖𝑖𝑖𝑖 disturbance
9| 1, 𝑖𝑖
2009 2006
2010 2007
2008
2009
2011
2014 2012
2015 2013
2016 2014
2015
2016
𝑡𝑡 1, (𝑥𝑥𝑡𝑡 > 𝑘𝑘){

𝑑𝑑 =
2010
2006
2007
2008
2009
2011
2012
2006 2013
2014
2015
2016
ory variables. 𝜀𝜀 is a random 0 disturbance -50 -5 -5 -10

Per
-5 1, 𝑑𝑑 = 𝑖𝑖𝑖𝑖 { 1,}
50 𝑡𝑡 -10 0,
SACU
zilandThe
© 2018 0
-15 0, (𝑥𝑥𝑡𝑡 >𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝑘𝑘) 𝑖𝑖
9
2010
2007
2008
2009
2011
2012
2013
2006
2014
2007
2008
2016
2011
2012
2013
2014
variables 𝑦𝑦-50 , 𝑥𝑥 and 𝑍𝑍 -100

are as explained in eq. 9 |
9 | -10 𝑑𝑑Central
4.1 Public =-10 {Debt
-10 Threshold Model } 𝑑𝑑1,= { 𝑖𝑖𝑖𝑖 (𝑥𝑥
2010
2007
2008
2009
2011
2012
2013
2015
2016
𝑡𝑡 𝑡𝑡 𝑡𝑡
Bank Of Swaziland Where© 2018 𝑑𝑑 𝑦𝑦 is the
00 -50
SACU Growth rate
-15
Deficit/surplus as 0,% GDP 𝑂𝑂𝑂𝑂ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒=𝑡𝑡 {0, 0, depen
𝑂𝑂𝑂𝑂ℎ
(1). However,
SACU Growth rate 𝑥𝑥
-100𝑡𝑡 and 𝑥𝑥 2
are now
Deficit/surplus
-100
Source: SACU Member interpreted
-15 as States
% GDP as Where 𝑦𝑦
Whilst the-15 𝑡𝑡two approaches are equally important,𝑥𝑥𝑡𝑡
-15 is the dependent variable,
threshold variable and
debt is deterrent to economic growth. debt v
Consequently, the nonlinear quadratic the p
relationship between public debt and economic respe
growth can be represented as follows; perce
4.1 Public Debt Threshold Model 𝑦𝑦̂𝑡𝑡 = 𝜃𝜃𝑦𝑦̂𝑡𝑡−1 + 𝜑𝜑𝑞𝑞̂𝑡𝑡 + 𝛼𝛼𝑟𝑟̂𝑡𝑡 + 𝛿𝛿𝑦𝑦̂𝑡𝑡∗ + 𝜌𝜌𝑑𝑑̂𝑡𝑡 + 𝜎𝜎𝑑𝑑̂𝑡𝑡2 5. Est
Whilst the two approaches are equally
+ 𝜇𝜇𝑡𝑡 (5)
important, our study adopts the nonlinear The s
model of the quadratic form in line with Where Where 𝑦𝑦𝑡𝑡 ,yt𝑞𝑞, q𝑡𝑡 ,t, r𝑟𝑟𝑡𝑡t and
andyt𝑦𝑦* 𝑡𝑡∗are
arecontrol
control explanatory
explanatory
Pattillo et al. (2011). This approach is variables, which are explained above. The estima
variables, which are explained above. The public
preferred compared to the other approach public debt variable dt is the threshold robus
as represented in Eq. (1) because of its debt variable
variableand 𝑑𝑑𝑡𝑡 isa the crucial variable
threshold variablein and
our a
simplicity. However, unlike in Pattillo et al. analysis. The following θ, φ, α, δ, ρ and σ possib
crucial variable in our analysis. The following
(2011) who employ a panel data set of 93 are parameters to be estimated and μt is impac
developing countries, our study estimates 𝜃𝜃, 𝜑𝜑, the𝛼𝛼, error
𝛿𝛿, 𝜌𝜌 and term andparameters
𝜎𝜎 are is assumed to estimated
to be have a
a quadratic equation for one country, zero mean and a constant variance. The affecte
and 𝜇𝜇𝑡𝑡 is the error θ of the term and is assumed
lagged to have a
which is Swaziland. While a number of parameter one-period output
(Patti
studies investigate the nonlinearity of the zero gap meanis expected and ato constant be positive indicating
variance. The
relationship between public debt and growth output persistence. The real exchange rate Gener
by augmenting growth models with public parameter parameter θ ofφthe is one-period
expected to lagged output gap
be positive.
estima
debt, our study examines this relationship is This is the to
expected casebebecause positivean indicating
increase inoutputthe
from the demand side of the economy. real exchange rate, a real depreciation, that
Hence, the study uses the aggregate demand persistence.
improves The the external real exchange rate parameter
competitiveness of
hetero
equation as in Morón and Winkelried (2005) 𝜑𝜑 isdomestic expected exports to be leadingpositive. to This
an increase in
is the case
for Latin American countries. The proposed output growth. values
aggregate demand relates the output gap yt because an increase in the real exchange rate, a
instru
as a function of the one-period lagged output realThe depreciation,
coefficient α of improves the real interest the rate is
external
gap yt _1, the real interest rate rt, the foreign expected to assume a negative sign implying enable
output gap yt* and the real exchange rate qt. CentralthatBanka rise in the real
of Swaziland © 2018interest rate reduces
investment,
Page hence a reduction in economic
The nonlinearity relationship between growth. The sign of the coefficient δ of the
output growth and public debt is introduced foreign output gap is expected to be positive.
in the above aggregate demand model by An increase in the foreign output gap leads
including the squared term of the public to an increase in demand for domestic
debt d_t^2 and the linear term of the public goods and services, which in turn causes
debt dt.The combination of the linear and domestic output to increase. For a nonlinear
nonlinear terms of the public debt implies relationship to exist between the public debt
a hump-shaped relationship between and growth, hence an optimal threshold debt
public debt and growth. The turning point level, the signs of the parameters of the
of the quadratic equation determines the linear debt variable and the squared term
optimal threshold level of the public debt variable of the public debt must be positive
above which debt is deterrent to economic and negative, respectively. The hat above
growth. Consequently, the nonlinear the variables denotes percentage deviation
quadratic relationship between public debt from the steady state.
and economic growth can be represented as
follows;

5.0 ESTIMATION TECHNIQUES AND public debt as a percentage of GDP. For

DATA ANALYSIS short-term interest rates we use the treasury
The study estimates eq. (5) and subjects bill rate because it is market determined.
our estimation results to intensive array of The output gaps are generated by applying
robustness tests. In particular, we control a Hodrick-Prescott filter with a smoothing
for the possibility of endogeneity of debt so parameter settled on the standard value of
that the impact of debt on growth is robust 1600 on seasonally adjusted real GDP. The
and not affected by omitted variables or foreign output gap is proxied by the South
simultaneity bias (Pattillo et al., 2011). In African GDP given that more than 60 per
this regard, we use the Generalized Method cent of the country’s exports are destined
of Moments (GMM), an estimation technique, to South African markets. All variables are
which gives us estimates that are corrected presented as deviations from their steady
for endogeneity, heteroskedasticity and state, hence we work with stationary
autocorrelation. Lagged values of the data. Data come from the Central Bank of
endogenous variables are used as instruments. Swaziland quarterly bulletins except for the
Using the GMM estimation also enables us to South African GDP, which is sourced from the
test the specification of the proposed model IMF.
for over-identification through the Hansen
J test. The GMM estimation technique has 6.0 EMPIRICAL RESULTS
been used in a number of threshold models Table 2 presents results for eq. (5), which
such as in Pattillo et al. (2011). describes the dynamics of the nonlinear
aggregate demand of a small open economy
The study estimates eq. (5) and subjects that also takes into consideration of public
our estimation results to intensive array of debt. As indicated by the high adjusted R ̅^2
robustness tests. In particular, we control of 0.99, the explanatory variables including
for the possibility of endogeneity of debt so debt play an important role in explaining the
that the impact of debt on growth is robust variations in the output gap in Swaziland.
and not affected by omitted variables or The parameters of the explanatory variables
simultaneity bias (Pattillo et al., 2011). In are all statistically significant at 1 per cent.
this regard, we use the Generalized Method The J-statistic suggests that the model
of Moments (GMM), an estimation technique, passes the test for over-identification. This
which gives us estimates that are corrected suggests that there are no identification
for endogeneity, heteroskedasticity and problems in our specification.
autocorrelation. Lagged values of the
endogenous variables are used as instruments. Table 2: Estimates of the Non-linear
Using the GMM estimation also enables us to Aggregate Demand (Eq. (5))
test the specification of the proposed model Variable Parameter Std. t-Statistic Prob.
for over-identification through the Hansen Error
J test. The GMM estimation technique has yt -1 0.81 0.02 36.8 0.00
been used in a number of threshold models qt 0.03 0.00 6.57 0.00
such as in Pattillo et al. (2011). rt -0.35 0.06 -5.41 0.00
yt 0.12 0.01 8.96 0.00
The estimation is based on annual data for
the period spanning from 1980 to 2016. The dt 0.22 0.07 2.99 0.01
study uses the following data; short-term Rt -0.24 0.08 -3.05 0.01
interest rate, domestic output gap, foreign 0.99
output gap, real exchange rate and total
J-Stat. 0.94

11
consequently causes domestic output to increase
exchange rate is positive and consistent with by 0.12 per cent. The sign of the parameter 𝜌𝜌 of
theory. This suggestsC E Nthat a 1 per cent
T R A L B A N K O F S W A Z I L A N Dthe| linear variable
RESEA R C H B U Lof
L E Tthe public
IN VO L U M E 2debt 𝑑𝑑𝑡𝑡 is
depreciation in the exchange rate renders positive. The parameter 𝜎𝜎 of the nonlinear term
domestic exports more competitive in foreign of the public debt 𝑑𝑑𝑡𝑡2 is negative. This confirms
markets. Consequently,
The parameter this one-period
θ of the leads to an increase
lagged the existence
is negative. Thisofconfirms
a hump-shaped relation of
the existence between
a
output
in gap yaggregate
domestic t-1 carries demand,
the positive
hencesign in hump-shaped
raises relation between
output and public debt in Swaziland. output and
line with expectations. This means
output by 0.03 per cent. As expected, the that the public debt in Swaziland.
current output gap is positively related to
exchange rate affectsathe output gap with a lagofin
its past indicating 0.81 per cent degree To To
obtainobtain
thethe publicdebt
public debtthreshold
threshold levellevel we we first
output persistence.
Swaziland Theitcoefficient
indicating that φ which
takes time for output first express
express thethe estimated
estimated equation
equation as: as:
measures the elasticity
to respond to the exchange rate. of the output gap
with respect to changes in the exchange rate 𝑦𝑦̂𝑡𝑡 = 0.81𝑦𝑦̂𝑡𝑡−1 + 0.03𝑞𝑞̂𝑡𝑡 − 0.35𝑟𝑟̂𝑡𝑡 + 0.12𝑦𝑦̂𝑡𝑡∗
is positive and consistent with theory. This + 0.22𝑑𝑑̂𝑡𝑡 − 0.24𝑑𝑑̂𝑡𝑡2 (6)
The effect of
suggests theaexchange
that 1 per centrate on the output gap
depreciation in Secondly, we differentiate eq. (6) with respect to
isthe exchange
relatively rate
small. Thisrenders
is moredomestic
so because a small Secondly, we differentiate eq. (6) with
exports
the debt variable 𝑡𝑡 and equate
debt 𝑑𝑑variable dt andthe resultant
more competitive in foreign markets. respect to the equate
proportion of the total domestic exports are
Consequently, this leads to an increase in theexpression resultant to expression
zero. By to zero.for
solving By 𝑑𝑑solving
from the
destined
domestic to markets
aggregate outside the CMA
demand, and respond
hence raises forresulting
d from the resulting equation we obtain
equation we obtain a public debt
output
to by 0.03 rate
the exchange per between
cent. Asthe expected, and a public debt threshold level of about 46 per
Lilangenithe
threshold level of about 46 per cent of GDP for
exchange rate affects the output gap with a cent of GDP for Swaziland. This suggests that
the US Dollar used in this study. Otherwise, a
lag in Swaziland indicating that it takes time forSwaziland. public debt This
assuggests
percentage that offorGDP
public debt as
lower
large proportion of the total domestic
for output to respond to the exchange rate. exports are than 46 per cent of GDP, increasing debtcent
yields
percentage of GDP lower than 46 per of GDP,
destined to the CMA, particularly in South Africa, positive growth rates. However, beyond the
increasing debt yields positive growth rates.
The effect
which of the to
do not respond exchange the threshold level of 46 per cent of GDP rising
rate on Dollar
the Lilangeni/US
output gap is relatively small. This is more debt However,
reducesbeyond the threshold
economic growth. The levelresults
of 46 per
exchange rate because of the exchange rate parity indicate that a 1 per cent increase in the
so because a small proportion of the total cent of GDP rising debt reduces economic growth.
domestic exports are destined to markets public debt as percentage of GDP leads to a
Central Bank of Swaziland © 2018 13 |
Poutside
age the CMA and respond to the exchange 0.22 per cent increase in output when debt
rate between the Lilangeni and the US is below the 46 per cent of GDP. On the other
Dollar used in this study. Otherwise, a large hand, if public debt is above the 46 per cent
proportion of the total domestic exports of GDP, a 1 per cent rise in public debt is
are destined to the CMA, particularly in expected to reduce output by 0.24 per cent.
South Africa, which do not respond to the The estimated debt-to-GDP ratio is above
Lilangeni/US Dollar exchange rate because the 35 per cent limit set by government in
of the exchange rate parity between the its debt strategy and the World Bank’s 40 per
Lilangeni and the South African Rand. cent critical debt for developing countries.
It is also in line with the SADC convergence
The coefficient α of the interest rate rt, criteria of a public debt-to-GDP ratio of less
exhibits the theoretical expected negative than 60 per cent.
sign. This means that a 1 per cent increase in
the interest rate, which reduces aggregate 7.0 CONCLUSIONS
demand, causes output to shrink by 0.35 This paper determines an optimal public debt
per cent in the following period. The sign of threshold level above which increasing debt
the parameter δ of the South African output reduces economic growth in Swaziland. The
gap yt* is positive. This implies that a 1 per study builds on theoretical literature, which
cent rise in the foreign output increases suggest that debt initially causes growth to
demand for domestic goods and services, rise by increasing aggregate expenditure.
and consequently causes domestic output to However, as debt increases to higher
increase by 0.12 per cent. The sign of the levels tends to reduce growth by reducing
parameter ρ of the linear variable of the aggregate expenditure as public revenues
public debt dt is positive. The parameter σ are channeled towards servicing debt.
of the nonlinear term of the public debt dt2 This suggests a nonlinear relationship of a

quadratic form between debt and growth. one-period lagged depreciation increases
In this regard, we extend the aggregate exports leading to a 0.03 per cent increase
demand function by Moron and Winkelried in output. The coefficient of the interest
(2005) for Latin American countries by rate is negative at 0.35. This suggests that
adding the linear and squared terms of the a 1 per cent rise in the interest rate reduces
public debt-to-GDP. This formulation allows aggregate demand, which causes output
us to investigate the existence of a quadratic to fall by 0.35 per cent in the following
nonlinear relationship between public debt period. The parameter of the foreign output
and economic growth. Hence, the study as proxied by South Africa’s output has a
employs a quadratic nonlinear threshold positive value of 0.12. This means that a
model as in Pattillo et al. (2011). To control 1 per cent increase in the foreign output
for the possibility of endogeneity, the paper causes a 0.12 percent rise in the domestic
uses the Generalized Method of Moments output by increasing demand for domestic
(GMM) estimation technique. exports.
The GMM results confirm the existence Our findings, particularly with respect to
of a nonlinear hump-shaped relation the optimal public debt threshold level,
between public debt and economic growth suggests that Swaziland needs to adopt
in Swaziland. This is consistent with the debt-management policies that will allow
findings of Pattillo et al. (2011) for 93 the country to gradually move its public debt
developing countries and Bawa et al. (2016) level towards the estimated debt threshold
for Nigeria. Our empirical results suggest to support growth while also ensuring debt
that a 1 per cent increase in public debt-to- sustainability. However, this will yield
GDP has a short-run positive impact of 0.22 positive results provided that the debt funds
per cent and a long-run negative effect of are used to fund viable capital projects. The
0.24 per cent on growth. The optimal level preferred capital projects are those that
of public debt above which an increase in will have greater growth multiplier effects
debt reduces economic growth is estimated through usage of mainly local inputs, or at
at about 46 per cent of GDP. This threshold worst imports from SACU countries in order
is higher than the 35 per cent limit set by to earn the country higher SACU receipts.
government and the World Bank debt critical This would call upon government to identify
ratio of 40 per cent for developing countries. such projects in consultation with relevant
The estimated debt threshold for Swaziland stakeholders.
is also within the SADC convergence criteria
of a public debt limit of less than 60 per cent We therefore recommend that government
of GDP. Using the quadratic form relation, put in place policies that will ensure that
Mupunga and le Roux (2015) find an optimal debt accumulation, be it external or
growth-maximising public debt threshold of domestic, is consistent with the country’s
about 48 per cent of GDP for Zimbabwe. growth objectives. The recently established
debt management unit, which is highly
The coefficients of the control variables commendable, should spearhead and
exhibit the correct signs in line with theory expedite the formulation of such policies.
and highly statistically significant. The Sound communication and cooperation
parameter of the one-period lagged output between the ministry of finance and
is positive indicating a 0.81 per cent degree the central bank should be maintained
of output persistence. The exchange rate in managing public debt. In this regard,
coefficient has a positive value of 0.03. the central bank may have to maintain a
The results show that a 1 per cent of a positive interest rate differential with its

13
Common Monetary Area (CMA) counterparts, Checherita, C., Rother, P. (2012).

particularly with South Africa in order to The impact of high and growing
increase the competitiveness of government government debt on economic growth:
securities. Although keeping the interest an empirical investigation for the euro
rate relatively high may constrain the area, European Economic Review, 56
private sector, such policy stance helps to (7), 1392-1405.
achieve both the objectives of public debt
management and price stability. Codogno, L., Favero,C., Missale, A. (2003).
Yield spreads on EMU government
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Bakar, A., Hassan, S. (2008). Empirical Eberhardt, M., Presbitero, A. (2015). Public
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P. (2013). Debt and growth: new Government Debt, Handbook of
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Greiner, A. (2014). Public Debt and the
Bawa, S., Omotosho, B., Doguwa, S. (2016). Dynamics of Economic Growth. Annals
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Cecchetti, S., Mohanty, M., Zampolli, F. Mafusire, A. (2015). Assessing Swaziland’s

(2011). The real effects of debt, BIS fiscal sustainability and policy options,
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Palley, T. (1994). Debt, aggregate demand,
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15
Discount Rate Differential Monetary investment assets inflows with a p-value of

Policy Decisions in the CMA and 0.0148. The low level of development in the
financial sectors in Namibia and Swaziland
Portfolio Investment Assets: The
in particular in the depth of availability in
Efficacy of Namibia and Swaziland the variety of financial assets. According
Monetary Policy to literature in sub-Sahara (Gelard and
Leite,1999) the ratio of sub-Saharan
countries financial development is associated
Simiso F. Mkhonta5 with increased importance of deposits and
thus a lower ratio of narrow to broad money.
Abstract The resultant liquidity tends to be invested
outside the country due to the lack of a
A Panel regression model for Namibia and diversified and sophisticated development
Swaziland with data from 2010 Q1 to 2015 of the financial sectors in Namibia and
Q4 is employed with stationary data to Swaziland particularly in comparison to
allow for country specific effects in the South Africa. The fund managers in Namibia
estimation of the impact of the discount rate and Swaziland do respond positively to
differential with South Africa on portfolio higher domestic rates but are limited by the
investment assets. Serial correlation, low level of development of their financial
heteroscedasticity and normality are sectors and the risk of higher taxes being
corrected using the generalised least imposed in future due to high levels of fiscal
squares cross-section weights method deficits. The nature of development of the
of estimation. The Fixed Effects and financial sector is therefore pertinent for
Random Effects models are rejected using the efficacy of monetary policy in Namibia
the Likelihood ratio and Hausman tests and Swaziland.
respectively in favour of a panel regression
model. Namibia and Swaziland monetary Keywords: Discount rate Differential,
policy differential with South Africa is Capital Flight, Portfolio Investment Assets,
found to be statistically insignificant in CMA.
influencing portfolio investment assets with
a p-value of 0.7011. Financial development 1.0 INTRODUCTION
is found to reduce statistically significantly Monetary Policy is regarded as essential
portfolio investment assets in the economies in driving macroeconomic variables to
of Namibia and Swaziland with a p-value the desirable macroeconomic outcome.
of 0.0125. Higher GDP growth rates lagged Countries in a monetary union focus their
two quarters in Namibia and Swaziland are monetary policy in stabilising capital outflows
strongly related to higher levels of portfolio by maintaining their interest rates at par to
investment assets inflows with a p-value of the country pegged to and in the process
0.0647. A higher fiscal deficit is also strongly anchor inflation expectations to foster
correlated to a reduction in portfolio economic growth. The pegging countries in a
monetary union have independent monetary
policies.
South Africa, Lesotho, Namibia and

Swaziland belong to a Common Monetary
5
Simiso F. Mkhonta is a Senior Economist, Modelling
and Forecasting, in the Policy Research and Area(CMA). Namibia and Swaziland peg their
Macroeconomic Analysis at the Central Bank of discount rates to South Africa to stabilise
Swaziland.,reachable at SimisoF@Centralbank.org.sz. capital outflows anchoring the peg of their

currencies to the South African Rand. as the sum of private short-term capital
Lesotho phased out the discount rate and outflows and errors and omissions.
adopted the Lombard rate pricing it above
the 91-day TB rate and the lending rates in Section1 is the brief introduction, section
Lesotho respond very strongly to changes 2 is the literature review, section 3 is the
in the repo rate in South Africa (Sylvanus model, data and methodology. Section 4 are
Ikhide, 2010). Lesotho central bank has just the empirical results and section 5 is the
recently reverted back to setting interest conclusion.
rates with reference to South Africa’s repo
rate. Thus due to the lack of data where 2.0 LITERATURE REVIEW
monetary policy is actively set by the central Reviewed literature suggest that interest
bank of Lesotho, Lesotho is not included in rates are an important determinant of
the study. capital flight which is often measured as
portfolio investment assets Puah etl. (2012),
Sylvanus Ikhide, (2010) observed that lending Folorunso S. Ayadi (2008) and Dooley (1998).
rates, level of prices and money supply in The are many determinants of capital
the monetary union respond instantaneously outflows in literature and the following
to changes in the discount rate by the South critical factors will be discussed for the
African reserve bank with Namibia’s repo rate cases of Namibia and Swaziland: (1) the GDP
responding sharply compared to Swaziland’s growth rate differential (2) the fiscal deficit
as their central banks actively set interest (3) financial development (4) interest rate
rates. He confirms that South Africa discount differential.
rate is the relevant policy instrument for the
LNS countries. He concludes that due to the The following authors discuss these factors
asymmetry of shocks the LNS countries might in the context of capital flight; where capital
be able to undertake independent monetary flight is measured by portfolio investment
policy by setting their central bank discount assets as obtained in the balance of payments
rate lower than South Africa’s to stimulate statistics.
the economy.
Puah and et al (2012) employed a vector
The question that this study will therefore error correction model (VECM) to measure
address is whether the discount rate capital flight on macroeconomic variables
differential pursued by Namibia and for Malaysia using time series data from
Swaziland in their conduct of monetary policy first quarter of 1991 to the fourth quarter
do impact on international flow of portfolio of 2008. He explained capital flight as
investment assets. Many studies in literature errors and omissions and short-term capital
have supported the inflow of capital as a pre- outflows. The results showed that capital
requisite for economic growth with Lisa M. flight is determined by real GDP, the budget
Schineller (1997) extending the concerns to deficit, the treasury bill rate, foreign direct
the degree of economic, social and political investment and the stock market. All the
fracture. Most researchers address the variables were found to have the right signs
importance of capital inflows for economic and statistically significant. The treasury bill
growth under studies on capital flight. The rate was found to be negatively related to
current research therefore borrows most capital flight. He concluded that capital is
of its literature review from studies on expected to flow to developing countries
capital flight in developing countries. The in being attracted by a positive rate of
balance of payments approach popularised return on capital. His paper also finds that
by Cuddington (1987) define capital flight improvements of in the real GDP and budget

17
deficit stemmed capital flight. He linked real inflation and political stability. He finds
GDP growth to investors’ confidence and the the Real GDP to be negatively related to
improvement in the budget deficit to less capital flight and GDP growth to significantly
distortion in the economy as a conditions reduce capital flight both in the short and
to stall capital. The study shows that the long run. High economic growth brings about
financial markets liberalization and the opportunities for investment that discourage
deregulation of the international movement capital flight.
of capital in Malaysia resulted in an improved
stock market causing capital flight. 3.0 MODEL, DATA, AND
METHODOLOGY
Boyce and Ndikumana (2012) also measures The time-series data used in this study are
capital for 30 sub-Saharan African from 2010 Q1 to 2015 Q4 and sourced from
countries, including 24 countries classified the Central bank of Swaziland Quarterly
as severely indebted low-income countries Bulletin and the Bank of Namibia Quarterly
for the period 1970-1976. He finds that the Bulletin. Because the time-series is short the
difference between domestic interest rates data is pooled to solve the problem of a few
and US interest rates to have the expected degrees of freedom and to also allow for the
negative sign in both a pooled and cross- analysis of lagged values (Leonce Ndikumana,
sectional regression but in neither cases was 2010). Quarterly GDP data are not available
it significant at 10 per cent. Higher interest and are obtained by interpolating the yearly
rates in the sub-Saharan African countries GDP data.
than in the US curb capital flight. He found
the fiscal position to have an ambiguous The generalised least squares cross section
relationship with capital flight. Citing the weights is used to estimate the parameters
lack of accurate fiscal position statistics, of the model in order to solves the problem
he could therefore not reach any firm of heteroscedasticity, serial correlation and
conclusions. Boyce and Ndikumana (2010) normality in the data to avoid obtaining
found that an unfavourable foreign and parameters that are not best linear and
fiscal position are among causes of capital unbiased (BLUE) (Marius Ooms, 2007;
flight. FitzGerald (1997) also argues that Ruppert D and Carrol R,1998; Wooldridge,
panic sets in when foreign exchange reserves 2002).
levels fall in periods of high fiscal deficits
and investments move to countries with The foregoing literature review measures
better fiscal and foreign exchange reserves capital flight as portfolio investment assets.
positions. Most of the variables used in the literature
to explain capital flight are used in this
Folorunso S. Ayadi (2008) when employing study to explain portfolio investment assets.
ordinary least squares (OLS) and error The variables to use in the model are; (i) the
correction model (ECM) for Nigeria supports GDP growth differential (ii) the discount rate
the argument that higher domestic interest differential (iii) financial development and
rates than foreign interest rates reduce the (iv) the fiscal position. Portfolio investment
outflows of portfolio investment assets. In assets are expressed as a proportion of
fact, he finds interest rate differential to be GDP. The GDP growth differential and the
the most significant determinant of capital discount rate differential is expressed in per
flight in Nigeria. The other explanatory cent form, financial development is defined
variables he uses in the estimation of capital as M2 divided by GDP and the fiscal deficit is
flight are the total debt stock, exchange expressed as a per cent of GDP. The following
rate, real GDP growth, the trade balance, is the model:

M2 divided by GDP and the fiscal deficit
d as a per cent of GDP. The following is
= 𝐶𝐶 + 𝛽𝛽1 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖−2 + 𝛽𝛽2 𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖−1

+ 𝛽𝛽3 𝐿𝐿𝐹𝐹𝐹𝐹𝑖𝑖𝑖𝑖 + 𝛽𝛽4 𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖
Serial correlation of the error term is tested
+ ɛ𝑖𝑖𝑖𝑖 … … . (1) using the residual/panel cross-section
where;
dependence test; Breusch-Pagan (1980) LM;
GDPPit = is the position of portfolio Pesaran scaled (2004) LM, Bias-corrected
s the position of portfolio investment
investment assets as a proportion of GDP. scaled (2012) LM, and Pesaran (2004) CD. The
a proportion of GDP. 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖−2 = GDP growth rate differential Breusch-Pagan LM test is also used to detect
(Namibia
e differential (Namibia andand Swaziland GDP growth rate
Swaziland for the presence of heteroscedasticity. The
less South Africa growth rate) lagged twice; tests show that there is a presence of serial
h rate less South Africa growth rate)
DDit-1 = Discount Rate Differential (Namibia correlation and heteroscedasticity. The error
ce; 𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖−1 = Discount Rate Differential terms for Namibia is found not be normally
and Swaziland discount rate less South
and Swaziland discount rate less South
Africa discount rate) lagged once; LFDit = distributed.
count rate) lagged log Financial
once; 𝐿𝐿𝐹𝐹𝐹𝐹development
𝑖𝑖𝑖𝑖 = log measured as M2/
GDP; DEFasit= fiscal deficit as a per cent of GDP. The step wise approach is applied to the
development measured M2/GDP;
variables in the model and the significant
al deficit as a per cent of GDP. Research Bulletin Volume 2
The variables are tested for stationarity variables remain, which are the GDP growth
using
A stepwise
les are tested for the pool
usingunit
approach
stationarity theof root test explanatory
adding differential,and
and the null development financial development
the fiscal position. and
The thefinal
hypothesis of unit fiscal position.
root is rejected by the Im, robust model is the following: The final robust model is the
variables
oot test and the nullone by one
hypothesis ofand
unitretaining those that are
Pesaran Shin W-stat, ADF-Fischer Chi-square, following:
cted by thesignificant
Im, Pesaran Shin
in
PP-Fischer W-stat,
panel dataADF-
Chi-square, regression
and theestimation
Levin, Lin is &
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖 = 𝐶𝐶 + 𝛼𝛼1𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖, 𝑡𝑡 − 2 + 𝛼𝛼2𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖
ChntChi-square,
-square, PP-Fischer
used (Ndikumanato test.andThe stationarity
andBoyce,
the 2002). of the variables
Namibia and + 𝛼𝛼3𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 + ɛ𝑖𝑖𝑖𝑖 … … … (2)
& Chnt to test. isTheimportant
stationarityasofittheallows for country-specific
Swaziland being different countries could have
effects in the estimation.
s important as it allows for country-
unique country characteristics that are usually 4.0 EMPIRICAL RESULTS
4.
ects in the estimation.
A stepwise approachof oftheadding The Empirical
following Results
equation is obtained from
evident in the behaviour data. explanatory
The fixed
variables one estimation
The following using
equationpanel regression:
is obtained from estimation
20 | Pby
a g eone and retaining those
effectsthatmodel is used to capture the unique
are significant in panel data regression using panel regression:
estimation is usedin(Ndikumana Table 1. Panel Regression Model Results
characteristics of entities a panel data and
set upBoyce,
by Table 1. PanelDependent
Regression Model Results.
2002). Namibia and Swaziland being variable: GDPP
creating cross-sectional dummy variables. The Coefficient
different countries could have unique Dependent variable: GDPP t-Statistics Prob.
interrelationship of the unique characteristics
country characteristics that are ofusually
the Constant Coefficient
-0.011930t-Statistics
0.317029 Prob.
0.7529
Constant -0.011930 0.317029 0.7529
evident
individual in the
entities behaviour ofdata
in cross-sectional themakes
data.theThe GDPgr(-2) 0.001711 1.349819 0.1849
GDPgr(-2) 0.001711 1.349819 0.1849
fixed effects model is used to capture the DD(-1) DD(-1) 0.034620
0.034620 0.437399
0.437399 0.6642
0.6642
fixed effects
uniquemodel unable estimates
characteristics and unreliable
of entities in a panel LFD LFD -0.022602-1.640646
-0.022602 -1.640646 0.10809
0.10809
because data set upof the
the effects by unique
creating cross-sectional
characteristics of DEF
DEF -0.000888
-0.000888-2.0005850
-2.0005850 0.0518
0.0518
dummy variables. The interrelationship of Observation;
Observation; 44 44
counterpart entities will not be captured. The across balanced
balanced panel
the unique characteristics of the individual panel
entities relationship
entities of the uniqueness
in cross-sectional of the
data entitythe R Rsquared
makes squared 0.141935
0.141935
DW
DW 1.612781
1.612781
fixed effects
is captured model unable
by the estimation estimates
of random effectsand F-statistics
F-statistics 1.490183
1.490183
unreliable because the effects of the unique
model.characteristics
The fixed and random effects modelsentities
of counterpart are
will and
not rejected
be captured. Only the fiscal deficit is found to be
estimated accordingThe across
to the entities Only
redundant the fiscal deficit is found to be significant and
relationship of the uniqueness of the entity significant and when the model is corrected
fixed effects and hausman tests respectively. when theheteroscedasticity,
model is corrected for heteroscedasticity,
is captured by the estimation of random for autocorrelation
effects model. The fixed and random effects autocorrelation and normalityand of normality
the error ofterm, financial
the error term,
Serial correlation of the error term is tested using development and GDP growth rate
models are estimated and rejected according financial development and GDP growth rate
the residual/panel
to the redundant cross-section dependence
fixed effects test;
and hausman differential becomes significant (see table 2
tests respectively. below). becomes significant (see table 2 below).
differential
Breusch-Pagan (1980) LM; Pesaran scaled (2004)
LM, Bias-corrected scaled (2012) LM, and Pesaran Table 2. Panel Regression Model
Results/Corrected for Heteroscedasticity and
19
(2004) CD. The Breusch-Pagan LM test is also used Autocorrelation.
to detect for the presence of heteroscedasticity. The Dependent variable:GDPP( Portfolio Investment Assets)
Independent Coefficients t-Statistics Prob.
Table 2. Panel Regression Model Results/ fiscal position are found to be statistically
Corrected for Heteroscedasticity and significant. The GDP growth rates for
Autocorrelation Namibia and Swaziland increase above that
Dependent variable: GDPP (Portfolio Investment Assets) of South Africa leads to an improvement in
Independent variable Coefficients t-Statistics Prob. the level of portfolio investment assets in
Constant -0.000138 -0.035593 0.9718 the respective economies. Low GDP growth
GDP growth (-2) -0.002296 1.82193 0.0659 encourages portfolio investment assets
Discount rate differential -0.00390 0.386676 0.7011 outflows (Ndikumana and Boyce 2000; Pastor
Financial development -0.027398 -2.068415 0.0453
1990; Nyoni, 2000).
Deficit -0.001073 -2.514358 0.0162
Observations; balanced 44
panel
The discount rate differential increase i.e.
R squared 0.22386 when the Namibia and Swaziland discount
DW 1.547792 rates are higher than South Africa’s discount
F-statistics 2.804493 rate the level of portfolio investment
assets outflows reduces but insignificantly.
Table 3 presents the final model arrived at In 10 attempts only 3 are likely to attract
by dropping the insignificant discount rate portfolio investment assets in a sample of
differential which is shown in table 2. The 44 observations. Investors are assumed
chances of the discount rate differential to seek to maximise profits and would
to influence portfolio investment assets is allocate funds between domestic and
merely 30 per cent or rather 3 out of 10 foreign financial markets, placing the funds
chances. to where the returns are high. Risks and
returns to investment based on portfolio
choice determine the outflow of funds. The
Table 3. Panel Regression Model without higher the discount rate as a proxy for the
the Discount Rate Differential returns on financial assets should attract
Dependent variable: GDPP (Portfolio Investment Assets)
more investment.
Independent variable Coefficients t-Statistics Prob.
Constant 0.000798 -0.232295 0.8175
The low level of development of the financial
GDP growth rate (-2) 0.002136 1.899524 0.0647
sector in particular in terms of diversification
Financial development -0.023741 -2.615909 0.0125
in the choice of financial products compared
Deficit -0.001024 -2.547399 0.0148
to South Africa in both Namibia and
Observations; balanced 44
panel Swaziland discourages portfolio investment
R squared 0.221093 in two countries vis-à-vis South Africa. Risk
DW 1.512939 aversion has driven portfolio investment
F-statistics 3.784663 assets in Namibia and Swaziland with fund
managers indicating that the discount rate
Most of the independent variables differential has some-what affected their
significance improves under the panel decision to either place the funds locally or
regression model. The final model in table 3 internationally particularly in South Africa.
with a larger F-statistics is selected (Kadane This happens within the confines of the
and Lazar, 2004) after the correction of serial local compliance with legislation by fund
correlation, heteroscedasticity, normality managers, the pension fund managers and
and the dropping of the insignificant variables other financial institutions. The insurance
to remain with the final specification of the companies such as the Swaziland Royal
model in table 3. As opposed to the discount Insurance Corporation, Aon and Metropolitan
rate differential the GDP growth rate mostly engage fund managers for the
differential, financial development and the investment of their funds.

Commercial banks besides interest rate defended in the spirit of Gelbard and Leite
risks which they manage within defined (1999).
risk limits while integrating the impact of
liquidity risk maintain current accounts in The effects of financial development in
South Africa for the purpose of facilitating literature has been mainly found to be mixed
customer demand for South African Rands. owing to the challenged definition of financial
The commercial banks have been influenced development. Gelbard and Leite (1999) in a
by the discount rate differential between study on measuring financial development
South Africa and Swaziland and excess funds in 38 Sub-Saharan Africa, found that even
are naturally placed in the accounts giving though there has been improvement in
better yields while taking into account the financial development in Sub-Sahara Africa,
need to meet daily customer obligations. The in many countries the range of financial
money market portfolio consists mainly of products remains extremely limited. Interest
Swaziland Treasury Bills for both compliance rate spread are wide, capital adequacy ratios
and investment purposes and the balanced are insufficient, judicial loan recovery is a
fund is then split between the Rand current problem, and the share of nonperforming
account and central bank call account. The loans in large. The composition of M2 is
fund managers and commercial banks also critical in determining the influence of
prefer to invest in in South Africa because the financial development when it is measured
market has a variety of highly liquid financial as M2/GDP. In the same study Gelbard and
products which can be readily tapped into Leite (1999) further note that financial
when the need arises. These allocation development is associated with increased
needs shroud the effect of the discount rate importance of term deposits and the ratio
differential on portfolio investment assets. proportion of cash in M2 is dominant which
assets are susceptible to be invested across
Financial development is found to encourage the border. The commercial banks naturally
portfolio investment assets outflows, which place excess funds in better yielding accounts
could be least expected. The development and to meet daily customer obligations.
of the financial sector has to present
expanded and varied opportunities for The fiscal deficit is found to encourage
domestic portfolio diversification (Puah and portfolio investment assets like in the
Liew, 2012). The financial development in studies by Puah and Lewis (2012) and Leonce
Namibia and Swaziland are not diversified and Boyce (2002) as earlier mentioned. A
enough to withstand the attraction of funds percentage point improvement in the fiscal
to the South African financial sector. Collier, deficit results in an outflow of 0.102 per
Hoeffler and Pattillo (2001) found that cent of GDP in portfolio investment assets
financial development is not statistically and a per cent improvement in financial
significant in driving portfolio investment development leads to an outflow of 0.024
assets when using M2/GDP. They also find per cent of GDP in portfolio investment
financial development to have an incorrect asset. For fear of future taxation due to
expected sign hence they drop it out of the central government running successive
the model specification. But due to the deficits economic agents change their
ambiguities of the influence of financial holding of local financial assets to foreign
development on portfolio investment exchange denominated financial assets by
assets flows the variable is not dropped but transferring their funds to South Africa.

21
CONCLUSION Cuddington.J.T., 1987, Macroeconomic

The objective of the study is to ascertain Determinants of Capital Flight: An
the impact of higher or lower discount Econometric Investigation, in D.R.
rates, the monetary policy tool for Namibia Lessard, and J. Williamson, (eds),
and Swaziland, than that of South Africa on Capital Flight and Third World Debt,
portfolio investment assets is found that the Institute for International Economics,
impact is statistically insignificant due to the Washington, D.C.
low development of the respective countries
financial sector. If Namibia and Swaziland’s E.V.K. FitzGerald; 1997, Short-term Capital
intention of setting the discount rate higher Flows, The Real Economy and Income
than that of South Africa is to attract Distribution in Developing Countries;
portfolio inflow they should accelerate QEH Working Paper Series QEHWPS08;
the development of their financial sectors. Working Paper Number 8.
Swaziland has embarked on the financial
sector development implementation plan Folorunso S. Ayadi., 2008, Econometric
(FISDIP) which would go a long way in Analysis of Capital Flight in Developing
improving the efficacy of monetary policy. Countries: Study of Nigeria, University
The nature of the development of the of Lagos.
financial sector is critical to broaden the
lower ratio of narrow to broad money. Jeffrey M. Wooldridge., 2002, Econometric
Diversification and sophistication of Analysis of Cross Section and
products in the financial sector are seen as Panel Data, MIT Press Cambridge,
key to the development of a financial sector Massachusetts London, England.
for the discount rate differential to attract
or deflect portfolio investment assets for Joseph B. Kadane and Nicole A. Lazar.,
Namibia and Swaziland. Methods and Criteria for Model
Selection, Carnegie Mellon University,
REFERENCES Pittsburgh, PA 15213.
Gelbard and Sergio Pereira Leite., 1999,
Measuring Financial Development in Lisa M. Schineller.,1997, An Econometric
Sub-Saharan Africa, IMF Working Paper Model of Capital Flight from
WP/99/105. Developing Countries; International
Finance Discussion Paper Number 579.
_______Bank of Namibia Quarterly Bulletin.
Leonce Ndikumana and James K. Boyce.,
Baditt Baltag, Qu Feng and Chiwa Kao., 2002, Public Debt and Private Assets:
2010, A Lagrange Multiplier Test for Explaining Flight from Sub-Saharan
Cross-sectional Dependence in a Fixed African Countries, University of
Effects Panel Data Model. Massachusetts-Amherst, Economic
Department Working Paper Series.91.
_______Central Bank of Swaziland
Quarterly Reports. Leonce Ndikumama and James K. Boyce.
2002, Measurement of Capital Flight:
Chin-Hong Puah, Siew-Ling Liew Methodology and Results for Sub-
and M. Affendy Arip., 2007, Saharan African Countries; African
Determinants of Capital Flight in Development Review, Vol 22, No 4,
Malaysia, www.researchgate.net/ 2010, pp 471-481.
publication/308076061.

Michael P. Dooley., 1998, Capital Flight A Washington DC: The IMF Institute, 256-
response to Financial Risks, External 99. Olopoenia, R, (2000).
Adjustment Division IMF working
paper. Paul Collier, Anke Hoeffler and Catherine
Pattillo., 1999, Flight Capital as
Manuel Pastor., 1990, Capital Flight in Latin a Portfolio Choice; IMF working
America, World Development, 1990, Paper/99/177.
vol. 18. Issue 1, pp 1-18.
Sylvanus Ikhide and Ebson Uanguta., 2010,
Nyoni. T., 2000, Capital flight from Impact of South Africa’s Monetary
Tanzania, in I. Ajayi and M.S. Policy on LNS Economies, Journal of
Khan(eds), External Debt and Economic integration, 25(2), June
Capital Flight in sub-Saharan Africa. 2010; 324-352.

23
An Assessment of the Impact brings 20 cents to GDP in the 10-year horizon

of Fiscal Policy on Output in compared to 11 cents for a Lilangeni change in
revenue. Disaggregating expenditure further
Swaziland: A Determination of
to capital and recurrent, it was found that
the Size of Fiscal Multipliers in capital expenditure multipliers are higher
Recessions and Expansions at E2.00, compared to 32 cents for recurrent
expenditure in the 10-year horizon. The
Bongani P. Dlamini6 results for the non-linear multipliers show
that multipliers are higher during times of
Abstract recession than expansion, with a Lilangeni
increase in expenditure bringing 89 cents
This paper seeks to estimate and assess fiscal to GDP in recessions compared to 39 cents
multipliers in recessions and expansions in in expansions. Therefore, the results show
Swaziland, more specifically to evaluate that authorities should direct much of the
how government spending impacts output expenditure to capital projects, particularly
during those times. The study used annual during recessions.
data spanning from 1980 to 2016. Following
Blanchard and Perotti (2002), the study Key words: Fiscal Multipliers, Government
applied the structural vector autoregression Spending, Output, SVAR, Swaziland.
(SVAR) model to estimate linear multipliers.
To estimate non-linear multipliers (during 1.0 INTRODUCTION
expansions and recessions), the study Swaziland experienced a fiscal revenue boom
employed the multivariate threshold when the Southern African Customs Union
autoregression (MTAR) by Tsay, (1998). (SACU) receipts more than tripled during
The multipliers were estimated for both 2004 – 2009 period after the introduction of a
aggregated and disaggregated expenditure new revenue sharing formula. SACU receipts
data. Cointegration was tested using the finances over 50 per cent of the country’s
Johansen approach, where a long run national budget. The extra revenues
relationship among the variables was found financed mostly wages, which are almost 50
to exist. Impulse response analysis shows percent of revenues and about 17 percent
that the response of GDP is not significant of gross domestic product (GDP) since the
for revenue but significant to expenditure. 2009/10 financial year. The public wage bill
When expenditure was disaggregated to is one of the highest in Sub-Saharan Africa
capital and recurrent, the results shows (SSA) making the country vulnerable to a
that GDP response is significant for capital decline in SACU revenues. The high wage
than recurrent expenditure. The impulse bill also crowded out capital expenditures
response functions were then used to so that investment as a share of GDP fell to
estimate linear multipliers, where it was almost half of the average for SSA in 2014
found that for the accumulated multipliers, – estimated to reach about 11 percent of
a positive Lilangeni change in expenditure GDP. Capital expenditure had not exceeded
25 per cent of total expenditure since 2006,
which spell doom for economic growth. The
decline in SACU receipts from E7.49 billion
in 2014/15 fiscal year to E5.25 billion in
6
Bongani P. Dlamini is a Senior Economist, Policy 2016/17 spells doom for the country, hence
Research, in the Policy Research and Macroeconomic the need for more fiscal prudent measures.
Analysis at the Central Bank of Swaziland.,reachable Data shows that the estimated budget
at BonganiD@Centralbank.org.sz. outturn for 2016/17 is E14.4 billion while

expenditure is at E21.2 billion, leading to 60 percent of total exports (CBS Quarterly,

a budget deficit of E6.8 billion, equivalent December 2016).
to 12.3 per cent of GDP (CBS Annual Report,
2015/16). Going forward, real GDP growth is expected
to shrink by 0.6 per cent in 2016 from a revised
Figure 1: Swaziland’s GDP Growth, Revenue estimate of 1.9 per cent in 2015 (previously
and Expenditure Trends (1980 to 2016) Research Bulletin1.7 per2 cent). Decreases are expected mainly
Volume
25000000 15.00
in the above
standing primary and secondary
60 percent sectors.
of total exports (CBS The
projected deceleration in output is mainly
20000000 Quartely, December 2016).
informed by the drastic effects of the
% growth rates
10.00
15000000 drought
Going forward,experienced by the iscountry
real GDP growth expected into2016,
E'000
10000000 which had devastating effects on agriculture,

5.00 shrink by 0.6 per cent in 2016 from a revised
agro-processing, power generation and
5000000
estimate of 1.9 perThis
water supply. centisinprojected
2015 (previously 1.7
to be further
0 0.00 compounded by arelower SACUmainly
inflows
per cent). Decreases expected in for
the the
1980
1985
1990
1995
2000
2005
2010
2015
2016/2017 fiscal year which compromises

primary and secondary sectors. The projected
Revenue Expenditure GDP_Growth government activity in the short to medium
deceleration in output is mainly
term, particularly informed by the
in financing capital
Source: Ministry
Source: Ministry ofandFinance
of Finance and Central
Central Statistical Office projects,
Statistical drastic effects which are known
of the drought to drive
experienced by the the
Office economy (CBS Quarterly, December 2016).
During the period between 1980 and 1989, GDP country in 2016, which had devastating effects on
Capital expenditure, however, has always
growth the
During in Swaziland
period averaged
between6.11980 percent,andwith a
1989, agriculture, agro-processing, power generation
been lower than recurrent expenditure over
GDP
high ofgrowth
over 10 per in cent
Swaziland
in 1987. That averaged
was during6.1 and thewater
years, supply.andThis hasis never
projected to be further
exceeded 40 per
percent, with a high of
the times of political unrest in the country’sover 10 per cent cent, as shown
compounded by lowerin theSACUfigure below.
inflows for the
in 1987. That was during the times of
neighbours, making the country a perfect 2016/2017 fiscal year which compromises
political unrest in the country’s neighbours, Figure 2: Capital and Recurrent Expenditure
investment
making thedestination.
country aHowever, perfectthat picture
investment government activity in the short to medium term,
as a Percentage of total Expenditure Research Bulletin Volu
destination.
changed in theHowever, 90’s when those that unrests
picturesubsided,
changed particularly in financing capital projects, which mediu
inresulting
the 90’s when those unrests subsided, 100
to the growth rates to average 3.8 per are known to drive the economy (CBS Quartely, gover
resulting to the growth rates to average 80
cent between 1990 and 1999. The poor December 2016). Capital expenditure, however, defici
3.8 per cent between 1990 and 1999.
Percent
60
performance
The of the economy continued
poor performance of the into the
economy has always been lower than recurrent 2014/
40
continued
turn of the into the turn with
millennium, of thegrowth millennium,
rates expenditure over the years, and has never reach
with growth rates averaging
averaging 2.4 percent between 2000 and 2016,
2.4 percent 20
exceeded 40 per cent, as shown in the figure budge
between 2000 and 2016, and reached a high 0
and reached a high of over
of over 3.5 per cent in 2007. This growth 3.5 per cent in 2007. below. This t
2013
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2016
was
This driven
growth was by driven
the manufacturing
by the manufacturing sector, Figure 2: Capital and Recurrent Expenditure as a financ
which is the main growth
sector, which is the main growth engine and in engine and in Percentage of total Expenditure
Capital Expenditure (% of Total
turn encouraged rapid growth in supporting expenditure)
1.1
turn encouraged rapid growth in supporting
sectors such as construction. Manufacturing Gener
sectors rangesuch as construction. Manufacturing Recurrent Expenditure (% of Total
entities from small factories engaged
Expenditure) have a
inentities
light rangeindustry to large
from small factories ones endowed
engaged in
with the latest technology and producing Source: Ministry of Finance
Source: Ministry of Finance of th
light industry to large ones endowed with the
highly sophisticated goods which, given Just like other countries, Swaziland experienced a conce
latest technology and producing highly
the small size of the domestic market, are Just like other countries, Swaziland chann
sophisticated goodsfor which, severe financial crisis in 2009/10, which had
destined mainly thegivenexport the small
market.size of
The experienced a severe financial crisis in
been looming since 2008 with massive declines in which
sector’s
the domestic contribution
market, areto exportmainly
destined earnings
for the has 2009/10, which had been looming since
improved recently, there
export market. The currently standing above
sector’s contribution to SACUwith
2008 revenues
massive after declines
the global financial
in SACUcrisis. To
revenues
date the country has not fully recovered from the are ch
export earnings has improved recently, currently
25
crisis. At the onset of the financial crisis in 2010 social
when SACU revenue declined by over 6027percent subca
Central Bank of Swaziland © 2018 |
Page
the country has had to undertake some major
after the global financial crisis. To date the Figure 3: Sub-categories of Expenditure in
country has not fully recovered from the Swaziland
crisis. At the onset of the financial crisis in
2010 when SACU revenue declined by over
60 percent the country has had to undertake
some major reforms (both structural and
institutional) to ensure financial stability.
These reforms have been stipulated in
the Fiscal Adjustment Roadmap (FAR,
2010) document which was produced by
the International Monetary Fund (IMF) in
consultation with the Government of the There is currently no general consensus
Kingdom of Swaziland. on the share of the budget which can be
directed to each of the sub-sectors, save for
Amongst others, reforms on the expenditure bits and pieces of declarations which were
side included a wage freeze, a slowdown in signed at regional and international levels
the implementation of capital (investment) which were meant to guide budgeting in
projects, the Voluntary Exit Strategy to some components of the sub-categories. An
reduce the wage bill, and the introduction example is the Maputo declaration, which
of the value added tax (VAT). These reforms states that at least 10 per cent of a country’s
were for the short to medium term and were national budget should be allocated to
intended to reduce government expenditure agricultural activities. As a result, budgeting
and bring the budget deficit to levels of about in Swaziland is based on needs basis, with
3 percent of GDP from 2014/15. Although the general public services getting a fare
a budget of 1.2 per cent was reached in share of the budget. It should be noted at
2014/15, the challenge remains as the this point that this category also caters for
budget deficits are spiralling in the later the wage bill, which is the largest stand-
years. This therefore means that there is alone component of the budget.
still a huge financing gap for the government
budget. Figure 4 shows the allocations to the three
components over the years, for both capital
1.1 The effect of fiscal policy on output and recurrent expenditure. From the figure,
Generally, a country’s fiscal policy is expected during the times of economic boom in the
to have a positive effect on output. In the 1980s, general public services has always
utilization of the scarce resources (revenue), been the lowest, at less than 30 per cent
a major concern is where exactly the of total expenditure. That scenario has
resources should be channelled to achieve changed since the 90s, with the component
the desired output, and by which variations. toping the others at over 40 per cent.
In the country’s budget system there are
three broad categories where resources are
channelled, which are general, economic,
and social services. Each of these categories
has subcategories as shown in the figure
below.

the channels through which these effects
public services has always been the lowest, at less
are transmitted, and
than 30 per cent of total expenditure. That
C E N T R A L B A N K O F S WA Z I L A N D | R E S E A R C H B Uthe
L L Evariations
T I N V O L U in
M Ethese
2 effects and channels
scenario has changed since the 90s, with the
with respect to economic conditions.
component toping the others at over 40 per cent.
Basically the issue at the centre of this debate is
Figure4:4:Expenditure
Figure Expenditure Components
Components as as a Share
a Share of effect that fiscal shocks (whether positive
Total Expenditure
of Total Expenditure thenegative)
or size of fiscal multipliers,
have particularly
on output and arewhen the
usually
60 defined
economyas is the percentage
in recession change in real GDP
or expansion.
that follows a fiscal shock totalling to one
40 1.2 cent
per Fiscal Multipliers
of GDP. Given that multipliers may
Per cent
be higher during crisis times, the question

20
In general,
of whetherfiscal multipliers
fiscal measure
consolidation the effect
might even
be
thatself-defeating, in thepositive
fiscal shocks (whether sense orofnegative)
putting
0 the public debt ratio on an unfavourable
have on output and are usually defined as the
path, has become central to the debate
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
percentage change
(Warmedinger, in real
et al., GDPCritics
2015). that follows
of fiscala
General public Services austerity
Social Services fiscal shock have argued
totalling that
to one per centconsolidation
of GDP. Given
suppresses demand further and thus leads
Economic Services that multipliers may be higher during crisis times,
to an even deeper recession. If the negative
Source:
Source: Ministry of Finance
Ministry of Finance impact
the questionon ofshort-term
whether fiscaleconomic
consolidationgrowth
might
Expenditure on social and economic services has is
evensufficiently large,
be self-defeating, frontloading
in the sense of puttingfiscal
the
Expenditure on social and economic services
been on the on
declining trend over trend
the years, in line
consolidation may prove to be self-defeating
has been the declining over the publicresult
debt ratio on an unfavourable path, has
and in higher public debt-to-GDP
years, in line with the fall in economic growth
Central Bank of Swaziland © 2018 ratios. The counterarguments typically 29 focus
|
Prates.
a g e The question that arises then is how on the necessity of consolidation to ensure
fiscal policy should be shaped to enhance
fiscal sustainability; any self-defeating
economic growth, and whether issues like
effects are seen at most as a short-term
fiscal stimulus can enhance growth.
phenomenon (Warmedinger et al., 2015).
According to Auerbach and Gorodnichenko,
According to Mitra and Poghosyan (2015),
(2012), this debate has long been a central
fiscal consolidation measures are considered
part of fiscal policy analysis. It was made
to have a large impact on growth when the
clear by the debate over the likely effects of
spending multiplier or the revenue multiplier
a fiscal stimulus in the US after the 2008/09
(in absolute value) exceeds one. A spending
financial crises, and elsewhere, economists
multiplier greater than one indicates that
are a long way from reaching a consensus.
public spending cuts harm economic activity
Indeed economists remain divided over
and produce a reduction in output larger
areas such as:
than the initial drop in public spending.
the strength of fiscal policy’s
Similarly, a revenue multiplier less than
macroeconomic effects,
negative 1 implies that raising one unit of
the channels through which these
taxes causes a decline in economic activity
effects are transmitted, and
of more than one unit. A spending multiplier
the variations in these effects and
less than one, or even negative, reflects a
channels with respect to economic
reversal of the initial decline in aggregate
conditions.
demand due to confidence effects, the
crowding-in of productive private sector
Basically the issue at the centre of this
activities, and reduced leakage through
debate is the size of fiscal multipliers,
imports. Distortions in private investment
particularly when the economy is in recession
incentives, households’ anticipation of
or expansion.
future tax declines (or spending increases),
or changes in inflation and imports caused
1.2 Fiscal Multipliers
by a change in tax policy could result in
In general, fiscal multipliers measure the
revenue multipliers that are larger than one

27
ch Bulletin Volume 2
ch Bulletin Volume C E N T R A L B A N K O F S WA Z I L A N D
2 result in revenue | RESEARCH BULLETIN VOLUME 2
et policy could multipliers that are
et
ed policy couldone
larger than result
andineven
revenue multipliers
positive in some that are
cases.
er
ed larger than one and even positive in some cases.
and
At itseven positive
simplest in some
level, fiscal cases.is the change
multiplier when the economy has slack, expansionary
er
he government spending shocks are less
At its simplest
in output level,
arising fromfiscal multiplier
a change in aisfiscal
the change
policy
he
th At its simplest level, fiscal multiplier is the likely to crowd out private consumption or
instrument.
in
change For instance;
outputinarising
outputfrom a change
arising frominaachange
fiscal policy
in a investment. To the extent that discretionary
th
al
fiscal policy
instrument. instrument.
For instance; For instance; fiscal policy is heavily used in recessions
𝑑𝑑𝑌𝑌 𝑡𝑡
al
nd to stimulate aggregate demand, the key
𝑑𝑑𝑍𝑍
𝑑𝑑𝑌𝑌𝑡𝑡𝑡𝑡
nd
he empirical question is how the effects of
𝑑𝑑𝑍𝑍𝑡𝑡 fiscal shocks vary over the business cycle.
he
ty where 𝑌𝑌𝑡𝑡 is output (or some other activity
where Yt is output (or some other activity The answer to this question is not only
y;
ty where
variable)𝑌𝑌𝑡𝑡 and
is output
𝑍𝑍𝑡𝑡 is a (or some
fiscal
variable) and Zt is a fiscal instrument,other activity
instrument, either interesting to policymakers in designing
y;a either government
variable)
government 𝑍𝑍𝑡𝑡 is aspending
andspending onfiscal on services,
goodseither
instrument,
goods and and
on stabilisation strategies but it can also help
services, ontransfers,
government transfers, or taxes the economics profession to reconcile
a
l., government spending on goods
or taxes orand
tax services,
rates. on
Since conflicting predictions about the effects
or tax rates. Since there are typically
l., government
there arethe
lags in transfers,
typically lagsorin
effects, taxes
one or tax distinguish
theshould
effects, rates. Since
one should of fiscal shocks across different types of
between impact multipliers (above) macroeconomic models (Auerbach and
there are typically
distinguish between lags in themultipliers
impact effects, oneand the
should
(above)
al cumulative multiplier: Gorodnichenko, 2012).
and the cumulative
distinguish betweenmultiplier:
impact multipliers (above)
ala
and the cumulative multiplier: 1.3 The Business Cycle
a ∑𝑛𝑛 𝑑𝑑 𝑌𝑌
ng 𝑗𝑗=0 𝑡𝑡+𝑗𝑗 The changing states of the economy during
∑ 𝑛𝑛
𝑛𝑛 𝑑𝑑 𝑍𝑍𝑡𝑡+𝑗𝑗
ng
te ∑𝑗𝑗=0
𝑗𝑗=0 𝑑𝑑 𝑌𝑌𝑡𝑡+𝑗𝑗 times of recession and expansion is referred
𝑛𝑛
∑𝑗𝑗=0 𝑑𝑑 𝑍𝑍𝑡𝑡+𝑗𝑗 to as the business cycle. Many variables are
te
er The interpretation
The interpretationofofthe
thefiscal
fiscalmultiplier
multiplieris used to measure the business cycle, which
is complicated by the fact that it is not can be capacity utilization, unemployment
m
er The interpretation
complicated by the of that
fact the itfiscal
is notmultiplier is
a structural
a structural parameter. Rather, in most gap, output gap, etc. This study limits
m
in relevant Rather,
parameter.
complicatedcontexts,
by the in therelevant
most
fact that it multiplier is the
is notcontexts, a
a structural itself to the output gap as a measure of the
in
ic function of structural parameters and policy business cycle. Output gap can be defined
parameter.
multiplier isRather, in most
a function relevant contexts,
of structural the
parameters
reaction parameters (Chinn, 2013). However, as potential output and its corresponding
ic
an multiplier
and the isyears,
overpolicy a function
reaction ofsimple
structural
parameters
this parameters
(Chinn,
estimation 2013).of
deviations from actual output. The most
an
es fiscal
and multipliers
policyover
However, reaction has shifted
parameters
the years, this simple to the
(Chinn, use
estimation2013).of
of
common measure of output gap which is also
es
an
econometric models, resulting in varying used in this paper is the Hodrick-Prescott
However,
fiscal
multipliersoveracross
the years,
multipliers has this simple
shifted
countries. to
For estimation
the use of
example, (HP) filter.
an
or Barro multipliers
fiscal and Redlick
econometric (2009)
has
models, find atomultiplier
shifted
resulting use of
the Research
in varyingofBulletin Volume 2
al
or 0.6 to 0.8 when using data on US defence Figure 5: US and Japan Recession Shadings
econometric
multipliers
zero bound,across models,
which occurs resulting
countries. in only
For example,
rarely and varying
Barro
in Figure 5: US and Japan Recession Shadings with
spending while Almunia et al. (2009) find a Swaziland’s with Swaziland’s
Output Output
Gap Gap
al
ce and Redlickacross
multipliers (2009) find than
a multiplier
countries. For of 0.6 to 0.8
recessions.
multiplier of greater one example,
when Barro
looking
Output_Gap
ce
te at the
and
when Great
Redlick
using dataDepression.
(2009) onfind
US adefence Theoretical
multiplier of 0.6 to
spending work0.8
while .05
These novel theoretical

by Christiano et al. (2009),findings for market-
Woodford (2010),
te
gh
.04
when
Almunia using data
et al. on US
(2009) finddefence spending
a multiplier while
of greater
and others
clearing modelsemphasise
echo earlierthat government
Keynesian
.03
gh
nt spending
Almunia
than may
oneetwhen have find
al. (2009)
lookinga large
at athe multiplier
multiplier in the
of greater
Great Depression.
.02
arguments that government spending is likely to .01
nt
ax US when
than the
one when
Theoretical nominal
worklooking interest
at the Great
by Christiano rate al.is (2009),
at the
et Depression. .00
have
zero larger
bound,expansionary
which occurs effects
rarelyin and
recessions
only in -.01
in
ax Theoretical
Woodford work by
(2010), andChristiano et al. (2009),
others emphasise that -.02
recessions.
than in expansions. Intuitively, when the -.03
in
ax government
Woodford spending
(2010), mayothers
have aemphasise
large multiplier
slack,and that -.04
economy has expansionary government 1980 1985 1990 1995 2000 2005 2010 2015
ax These novel theoretical findings for market-

government
in
spending spending
the US when theare
shocks may
less have
nominal a large
interest
likely multiplier
to rate
crowdis atout
the Source: Central Statistical Office and NBER
clearing models echo earlier Keynesian Source: Central Statistical Office and NBER
30 |
in the US
arguments
private whenthat
the nominal
consumption interestTo
government
or investment. rate
the is
spending at the
extent is Figure 5 shows Swaziland’s business cycle as
likely to have larger expansionary effects 30 | Figure 5 shows Swaziland’s business cycle
that discretionary fiscal policy is heavily used in measured by the HP filter as well as US recession
in recessions than in expansions. Intuitively, as measured by the HP filter as well as US
recessions to stimulate aggregate demand, the shadings from the National Berea of Economic
key empirical question is how the effects of fiscal Research (NBER). The figure shows that most
28 Central
shocks vary over the Bank Of Swaziland
business cycle. ©The
2018answer recessions in the country follows those of the US,
to this question is not only interesting to just like most countries in the world. This figure
recession shadings from the National Berea of fiscal expansions during recessions as a
Economic Research (NBER). The figure shows means of stimulating economic activity.
that most recessions in the country follows However, modern business cycle models, and
those of the US, just like most countries most empirical evidence suggests that these
in the world. This figure also incorporates policies are ineffective. The theoretical
Japan recession shadings. argument is that an increase in government
spending raises consumers’ expected tax
The Fiscal Multiplier over the Business Cycle burden, and this negative wealth effect
n Blanchard andthese
Despite Perotti (2002)
important theoretical business
and insights cycle,
largely which
curtails the implies
expansionthat fiscal policy i
of aggregate
and strong demand by the policy process for demand. The multipliers generated by these
t studies, estimates
their paper
of fiscal extends
multipliers,the ineffective
no empirical models even
are during very severe
small, hovering at most downturns.
around
research trying to assess how the size of fiscal one. Moreover, their size does not vary over
terature inmultiplies
three varies
ways.over First, using
the business cycleTraditional
has the business cycle, which implies models
that fiscalusuall
Keynesian (IS-LM-AS)
been carried out in Swaziland,
itching SVAR models, they estimated but elsewhere policy is ineffective even during very severe
in the world. Most of empirical research have downturns.
large multipliers since the size of th
in this policies
ax and spending area is based
that canon linear
vary structural
vector autoregressions (SVARs) or linearised multiplier (when
Traditional accommodating
Keynesian (IS-LM-AS) models monetar
business dynamic
cycle. Theystochasticfound largeequilibrium usually have large multipliers since the size
general
(DSGE) models, which by construction policy rule of keeps
the the interest(when
multiplier rate from rising) is give
accommodating
s in the size of fiscal multipliers
out state-dependent in
multipliers. monetary policy keeps the interest rate
by from rising) is given by
and expansions, with
In their work, fiscalandpolicy
Auerbach Gorodnichenko,
(2010) addressed this issue by providing
siderably more effective instate-dependent
recessions 1
estimates of fiscal
1 − 𝑀𝑀𝑀𝑀𝑀𝑀
pansions. multipliers. Building on Blanchard and
Perotti (2002) and subsequent studies, their
paper extends the existing literaturewhere in whereMPCMPCis is the the marginal
marginal propensity to
propensity t
of the paper is ways.
three organised
First, asusingfollows;
regime-switching consume which is typically quite large (about
SVAR models, they estimated effects ofconsume which
tax 0.5–0.9). To is typically
that extent, quite
the AS large
curve in(about
the 0.5
is the review of literature,
and spending section
policies that 3 over the
can vary IS-LM-AS model is upward sloping. Therefore
business cycle. They found large differences 0.9). Tothethat extent,
multiplier canthe varyAS curve
from in thelarge
relatively IS-LM-A
he methodology, section
in the size 4 presents
of fiscal multipliersthe
in recessions (the AS curve is flat and there is a great deal
model is upward sloping. Therefore the multiplie
and expansions, with fiscal policy being of slack in the economy; i.e., in a recession)
sults, multipliers for more
considerably aggregated
effective and
in recessions to relatively small (the AS curve is steeply
can vary from relatively large (the AS curve is fla
upward sloping and the economy operates
than in expansions.
ted data, as well as multipliers in at full capacity; i.e., in an expansion). In
and there is a great deal of slack in the economy
The rest of the
s and recessions, paper is
while organised5as follows; contrast, an increase in government spending
section
section 2 is the review of literature, sectioni.e., inina modern
recession) business to cycle modelssmall
relatively usually
(the A
3 presents the methodology, section 4 leads to a large crowding out of private
presents the models results, multiplierscurve for is steeply upward
consumption sloping
in recessions andand the econom
expansions
aggregated and disaggregated data, as well and correspondingly the typical magnitude
ture Review as multipliers in expansions and recessions, operates at full
for the capacity;
multiplier is lessi.e.,
thanin0.5
an(Auerbach
expansion). I
while section 5 concludes. and Gorodnichenko, 2012).
contrast, an increase in government spending i
dvocated a fiscal stimulus during the The majority of studies on fiscal multipliers
2.0 LITERATURE REVIEW modern business
Keynes advocated a fiscal stimulusduring have focused cycle
on themodels
advancedusually leads to
economies.
ression, and since then governments
large Acrowding
the Great Depression, and since then comprehensive literature review on fiscal
out of private consumption i
multipliers in advanced economies can
imes implemented fiscal expansions
governments have at times implemented
recessions and expansions and correspondingl
cessions as a means of stimulating
activity. However, modern business
the typical Central
magnitude for ©the
Bank Of Swaziland
29
2018 multiplier is les
be found in Baunsgaard et al. (2012), who in periods with a binding zero lower bound
extended and updated work undertaken by (ZLB) on nominal interest rates (which are
Spilimbergo, Symansky, and Schindler (2009). recessionary times) could be somewhere
Baunsgaard et al. (2012) review a total of 37 between 3 and 5. Intuitively, with the
studies including both model based (DSGE) binding zero lower bound, increases in
and vector autoregressive (VAR) approaches. government spending have no effect on
For those studies government spending interest rates and thus there is no crowding
multipliers range between 0 and 2.0, with a out of investment or consumption, which
mean of 0.8 during the first year after fiscal leads to large multipliers. A key issue coming
measures are taken. Government revenue out of recent economic events is the size of
multipliers range from about –1.5 to 1.4, fiscal multipliers when the economy is in
with a mean of 0.3. Coenen et. al. (2012) recession.
compared seven models used at policy making
institutions, and found that most models In a paper by Auerbach and Gorodnichenko
(of which six are DSGE models, including (2011), they extended the standard Structural
GIMF) have similar short run multipliers for Vector Autoregression (SVAR) methodology
temporary changes in government spending in three ways to shed light on this issue.
(roughly 0.6 to 1.5 under the normal conduct First, using regime-switching models, they
of monetary policy) and revenues (roughly estimated effects of fiscal policies that can
0.1 to 0.5 under the normal conduct of vary over the business cycle, and found
monetary policy). large differences in the size of spending
multipliers in recessions and expansions
In spite of an extensive literature, there is with fiscal policy being considerably more
still no consensus regarding the size of fiscal effective in recessions than in expansions.
multipliers, even in advanced economies. Second, they estimated multipliers for more
They tend to be smaller in more open disaggregated spending variables that behave
economies and in countries with larger differently in relation to aggregate fiscal
automatic stabilizers, but as the theoretical policy shocks, with military spending having
and empirical literature suggest, they differ the largest multiplier. Third, they showed
widely across countries. For the advanced that controlling for real-time predictions of
economies, Spilimbergo et. Al., (2009) fiscal variables tends to increase the size of
suggest that as a rule of thumb, government the multipliers in recessions.
consumption multipliers are 0.5 or less in
small open economies, with smaller values Blanchard and Perotti (2002), estimated
for revenue and transfers and slightly larger multipliers for government purchases and
ones for investment. Moreover, recent taxes on quarterly US data. They applied four
studies have concluded that multipliers are identifying assumptions; (i) discretionary
significantly larger when the economy is policy does not respond to output within a
undergoing a recession than when it is in an quarter, (ii) nondiscretionary policy responses
expansion (Auerbach and Gorodnichenko, to output are consistent with auxiliary
2012, Batini and others, 2012, Baum and estimates of fiscal output elasticities, (iii)
others, 2012). innovations in fiscal variables not predicted
within the VAR constitute unexpected
Some findings from DSGE models with fiscal policy innovations, and (iv) fiscal
some Keynesian features (e.g., Christiano, multipliers do not vary over the business
Eichenbaum, and Rebelo 2011; Eggertsson cycle. These multipliers are still commonly
2008; and Woodford 2011), however, suggest cited, although subsequent research has
that the government spending multiplier questioned whether the innovations in these

Research
transmission of monetary policy are impaired.

Second, some papers, which use a new “narrative”
SVARs really represent unanticipated changes that two thirds of the adjustment falls on
in fiscal policy, the challenge relating both approach to identify
expenditure exogenous
measures, this fiscal
wouldshocks, yield find
to expectations and to whether the changes an overall “normal times” multiplier of
in fiscal variables, notably taxes, represent largerabout tax 0.6. multipliers
However, these than standard
conventional results VAR
actual changes in policy, rather than other have been challenged by the more recent
changes in the relationship between fiscal models do.
literature. First, a number of studies have
variables and the included SVAR variables. shown that multipliers can exceed 1 in
The few empirical studies, which generally 3.0 Methodology
“abnormal” circumstances — in particular
employ a panel data approach to estimate when the economy is in a severe downturn
multipliers across emerging economies, tend Thereorare if various
the use approaches to estimating
and/or the transmission of fiscal
to validate the hypothesis that multipliers multipliers monetary as noted policyinare the impaired. Second,
review of literature. In
are indeed lower in emerging economies some papers, which use a new “narrative”
(IMF, 2008, Mendoza et. Al., 2011 and line with Blanchard
approach to identify andexogenous
Perotti (2002),
fiscal shocks,this study
Ilzetzki, 2011). Some studies even conclude find larger tax multipliers than conventional
that multipliers are generally negative, employs the structural
VAR models do. vector Autoregression
particularly in the longer term (IMF, 2008)
and when public debt is high (Ghosh and (SVAR), which consists of three variables, namely
3.0 METHODOLOGY
Rahman, 2008). Revenue-based stimulus real There GDP, arereal various netapproaches
revenueto and estimating real net
measures seem to be more effective at fiscal multipliers as noted in the review
boosting output in the short-term than expenditure. of literature.Revenue is defined
In line as total revenues
with Blanchard and
expenditure-based measures, in contrast Perotti (2002), this study employs the
to advanced economies, perhaps reflecting excluding transfers, subsides, and interest
structural vector Autoregression (SVAR),
concerns that, once implemented, increased which consists of three variables, namely
payments. Expenditure is defined as government
nce the earlyexpenditures
1990s, suggest are difficult
that first to remove.
transfers, subsides, real andGDP, interest
real net payments.
revenue and real net
Ilzetzki et al. (2011) and Ilzetzki (2011) find consumption expenditure. and investment.
Revenue Cointegration
is defined as total tests,
iers generallythat
lie between 0 and 1 in
while spending Expenditure
multipliers is defined as government consumption
are very revenues excluding transfers, subsides, and
small andalso
mes.” This literature not finds
generally
that significant, revenue
and investment. usingCointegration
the Johansen
interest payments. test
tests, werethe
using
Expenditure carried
is defined outasbefore
multipliers are positive and significant and government consumption and investment.
ultipliers tend lie
to be larger0.3
around thaninrevenue Johansen
the short term. the were
test
According estimations.
CointegrationIts
carried outpurpose before was
tests, using the
the to establish the
Johansen test
to Mendoza et al. (2010), the low overall
estimations. Its purpose was to establish the long
spending multiplier in emerging economies long run relationship between theestimations.
were carried out before the three variables.
run relationship Its purpose
between the three wasvariables.
to establishUsing the long run
could be due to the combination of a negative relationship between the three variables.
Using data from 1980 to 2016, and based on the
government
urvey of 41 such consumption
studies, Mineshima at multiplier
data fromand 1980ato 2016, Usingand databased fromon the to
1980 Cholesky
2016, and based on
positive response of output to government Cholesky the decomposition of the reduced
reduced form
how that first-year multipliers
investment with aamount
multiplier of decomposition
around 0.6 in of form the Cholesky
reduced decomposition
form VAR, the of the
VAR, the following structural VAR was
the short-term.
to 0.75 for government DSGE
spending simulations
and following VAR, the
andstructural
SVAR following
estimated:estimated:
VAR was structural VAR was estimated:
models, developed since the early 1990s,
government revenues in advanced
suggest that first year multipliers generally 𝑒𝑒 𝑇𝑇𝑡𝑡 1 0 𝑒𝑒0𝑇𝑇𝑡𝑡 𝜀𝜀 𝑇𝑇𝑡𝑡 1 0 0
lie between 0 and
Assuming, in line with recent fiscal 1 in “normal times.” This 𝜀𝜀 𝑇𝑇𝑡𝑡
[𝑒𝑒 𝑡𝑡 ] = [𝑎𝑎21 1 0𝐺𝐺]𝑡𝑡 ∗ [𝜀𝜀 𝐺𝐺𝑡𝑡 ]𝑎𝑎
𝐺𝐺
literature also finds that spending multipliers 𝑌𝑌𝑡𝑡 𝑎𝑎 𝑎𝑎
[𝑒𝑒 ] =𝑌𝑌𝑡𝑡[ 21 1 0] ∗ [𝜀𝜀 𝐺𝐺𝑡𝑡 ]
plans, that two thirds of the adjustment 𝑒𝑒 21 21 1 𝜀𝜀
tend to be larger than revenue multipliers. 𝑒𝑒 𝑌𝑌𝑡𝑡 𝑎𝑎21 𝑎𝑎21 1 𝜀𝜀 𝑌𝑌𝑡𝑡
enditure measures, this would yield an Where the left hand side of the equation contains a
Based on a survey of 41 such studies, Where Where
the the hand
left left handside side
ofintheof equation
the equation contains
mal times” multiplier of about 0.6.
Mineshima at al. (2014) showvector of residuals
that first-year in the reduced form, and
contains a vector of residuals in the reduced the
hese standard results amount
multipliers have been on average 0.75 a
rightto hand forvector
side isform,
theof squared
residuals
and in the inright
matrix the(A0reduced
) of sideform,
hand is theand in
government
by the more recent spending
literature. and
First, a 0.25coefficients
for government squared matrix (A0) of coefficients associated
revenues in advanced economies. Assuming,associated
the right with with
hand
lagged lagged
side variables
is
variables theand and
squared
structural matrixshocks(A0) of
tudies have shown that multipliers can
in line with recent fiscal adjustment structuralplans,
shocks through the
the column
throughassociated vector (ɛ).
column vector
coefficients with lagged variables and
in “abnormal” circumstances— in The assumption is that fiscal variables impact GDP
when the economy is in a severe
structural shocks through the column vector (ɛ ).
contemporaneously but GDP impacts
Central fiscal policy
Bank Of Swaziland © 2018
The assumption is that fiscal variables impact

31
r if the use and/or the transmission of decisions with a lag. The identification is the same as
The model as
Where𝑦𝑦𝑡𝑡𝜀𝜀= 𝜃𝜃0the
𝑡𝑡 is + 𝜃𝜃0error
𝑦𝑦𝑡𝑡−1 + … + This
term. 𝜃𝜃𝑝𝑝 𝑦𝑦𝑡𝑡−𝑝𝑝
is +a 𝜀𝜀univariate
𝑡𝑡 . 1998).
is known, bu
linear model; however, some data is known to
C E N T R A L B A N K O F S W A Z I L A NWhere
D | 𝜀𝜀𝑡𝑡 RisE the
S E A error
R C H Bterm.
U L L E This
T I N VisO a
L Uunivariate
ME 2 In this stud
1998).
exhibit some non-linear trends. That leads to the
linear model; however, some data is known to threshold v
introduction of the threshold variables to In this study
exhibit some non-linear trends. That leads to the economy i
separate the estimations into two or more threshold va
The assumption is that fiscal variables leads to the ofintroduction
introduction the threshold of the threshold
variables to downturn. T
regimes. Atotwo-regime threshold autoregression economy is
impact GDP contemporaneously but variables separate the
separate the estimations into two or more estimations into instead of
GDP impacts fiscal policy decisions with two or more
(TAR) modelregimes.
is presented A two-regime
as follows; threshold downturn. Th
regimes. A two-regime threshold autoregression output gap
a lag. The identification is the same as autoregression (TAR) model is presented as instead of o
in Blanchard and Perotti (2002), where 𝑦𝑦𝑡𝑡 model is presented as follows;
(TAR)
follows; to identify e
output gap is
unexpected movements in taxes can be due 𝜃𝜃0 + 𝜃𝜃0 𝑦𝑦𝑡𝑡−1 + … + 𝜃𝜃𝑝𝑝 𝑦𝑦𝑡𝑡−𝑝𝑝 + 𝜀𝜀𝑡𝑡 , 𝑓𝑓𝑓𝑓𝑓𝑓 𝑧𝑧𝑡𝑡−𝑑𝑑 ≤ 𝑟𝑟 as reliable e
to the response to unexpected movements 𝑦𝑦𝑡𝑡= {𝜃𝜃 + 𝜃𝜃 𝑦𝑦 + … + 𝜃𝜃 𝑦𝑦 + 𝜀𝜀 , 𝑓𝑓𝑓𝑓𝑓𝑓 𝑧𝑧𝑡𝑡−𝑑𝑑 ≥ 𝑟𝑟 to identify ec
0 0 𝑡𝑡−1 𝑝𝑝 𝑡𝑡−𝑝𝑝 𝑡𝑡 indicator fo
in GDP, response to structural shocks to 𝜃𝜃0 + 𝜃𝜃0 𝑦𝑦𝑡𝑡−1 + … + 𝜃𝜃𝑝𝑝 𝑦𝑦𝑡𝑡−𝑝𝑝 + 𝜀𝜀𝑡𝑡 , 𝑓𝑓𝑓𝑓𝑓𝑓 𝑧𝑧𝑡𝑡−𝑑𝑑 ≤ 𝑟𝑟 as reliable ex
={ one argum
spending, and to structural shocks to 𝜃𝜃0 + 𝜃𝜃𝑧𝑧0𝑡𝑡−𝑑𝑑
Where 𝑦𝑦𝑡𝑡−1is+a…threshold
+ 𝜃𝜃𝑝𝑝 𝑦𝑦𝑡𝑡−𝑝𝑝 + 𝜀𝜀𝑡𝑡 ,
variable 𝑓𝑓𝑓𝑓𝑓𝑓 𝑧𝑧𝑟𝑟𝑡𝑡−𝑑𝑑
and is ≥
the𝑟𝑟 indicator for
taxes. A similar interpretation applies to transition variable which separates the two effective in d
unexpected movements in spending in the Where 𝑧𝑧z𝑡𝑡−𝑑𝑑
Where t-d is a threshold variable and r is
is a threshold variable and 𝑟𝑟 is the one argumen
under a nega
the transition
regimes. variable variable
The transition which separates
is either effective in do
second equation. The third equation states transition variable which separates the two available in
the two regimes.
endogenous The transition
or exogenous variable
(Hansen 1996, 1997,is
that unexpected movements in output can regimes. The transition variable is either under a negat
either endogenous or exogenous (Hansen out of privat
be due to unexpected movements in taxes, and Tsay 1998). In general, it is possible to obtain available in t
1996, 1997,orand
endogenous Tsay 1998).
exogenous (HansenIn1996,
general, 1997, it
unexpected movements in spending, or to more than one critical threshold values, but for expected to
is possible to obtain more than one critical out of private
other unexpected shock in output. In order and Tsay 1998). In general, it is possible to obtain negative, wh
threshold values,
simplicity this study but for on
will focus simplicity
a model with this expected to
to test the robustness of the results, we then more than one critical threshold values, but for
study will focus on a model with
only two regimes, recession and expansion. In only two variables. T
estimated the same model with disaggregated negative, whi
regimes, recession
simplicity this study willandfocusexpansion.
on a model In withthis estimated
data for government expenditure. this paper, the MTAR model for 𝑦𝑦𝑡𝑡 that may also variables. Th
paper, the MTAR model for y t that
only two regimes, recession and expansion. In may also
dependon on some
some exogenous
exogenous variables 𝑥𝑥𝑡𝑡 , xcan be disaggregate
depend variables t , can estimated i
The impulse response analysis was carried out this paper, the MTAR model for 𝑦𝑦𝑡𝑡 that may also study used
bepresented
presented as follows;
as follows;
to determine the effects of various shocks in depend on some exogenous variables 𝑥𝑥𝑡𝑡 , can be disaggregated
examine the
the estimated model. The impulse response 𝑝𝑝 𝑞𝑞 study used a
presented as follows; times of rec
function in a VAR analyses dynamic effects (𝑗𝑗)
𝑦𝑦𝑡𝑡 = 𝑐𝑐𝑗𝑗 + ∑ 𝛼𝛼𝑖𝑖 𝑦𝑦𝑡𝑡−𝑖𝑖 + ∑ 𝛽𝛽𝑖𝑖 𝑥𝑥𝑡𝑡−𝑖𝑖 + 𝜀𝜀𝑡𝑡
(𝑗𝑗) (𝑗𝑗)
examine the
on the system when the model received the 𝑝𝑝𝑖𝑖=1 𝑞𝑞𝑖𝑖=1 Data was c
impulse of say one standard deviation shock. (𝑗𝑗) (𝑗𝑗) (𝑗𝑗) times of rece
𝑦𝑦𝑡𝑡 = 𝑐𝑐𝑗𝑗 + ∑ 𝛼𝛼𝑖𝑖 𝑦𝑦𝑡𝑡−𝑖𝑖 + ∑ 𝛽𝛽𝑖𝑖 𝑥𝑥𝑡𝑡−𝑖𝑖 + 𝜀𝜀𝑡𝑡 Swaziland, t
Given that the multipliers can differ given 𝑖𝑖=1 𝑖𝑖𝑖𝑖 𝑟𝑟𝑗𝑗 −1 < 𝑧𝑧𝑡𝑡−𝑑𝑑 𝑖𝑖=1 ≤ 𝑟𝑟𝑗𝑗 Data was co
Ministry of F
the state of the economy, various approaches Swaziland, th
has been undertaken in literature to where wherejj == 1,..s,1,..s, 𝑖𝑖𝑖𝑖 c𝑗𝑗−1
j are
𝑐𝑐𝑗𝑗 𝑟𝑟are < 𝑧𝑧constant 𝑟𝑟𝑗𝑗 vectors
𝑡𝑡−𝑑𝑑 ≤vectors
constant and p and andqp
4.0 Finding
Ministry of Fi
estimate multipliers in different states of and areqnonnegative
are nonnegative integers. integers.
The threshold The threshold
variable
the economy. Auerbach and Gorodnichenko variable where j = 1,..s, zt is𝑐𝑐𝑗𝑗assumedare constant to vectors
be stationary and p and and q
Stationarity
𝑧𝑧𝑡𝑡 is assumed to be stationary and have a 4.0 Findings
(2012) used the regime switching SVAR to show have a continuous
are nonnegative integers. distribution.
The threshold The model
variable
continuous distribution. The model has s regimes spurious reg
that output multipliers are countercyclical. has s regimes and is a piecewise linear model Stationarity t
is assumed
𝑧𝑧𝑡𝑡Central to be stationary and have a
Other studies use a threshold VAR (TVAR), in the threshold Bank of Swaziland space© z2018 t-d, but it is nonlinear
that spurious regr

Page
continuous distribution. Themodel model has s regimes
which is a simple method to model changing in time when s > 1. The assumes
dynamics of a set of variables over two or the Central threshold
Bank of Swazilandvariable © 2018 z_t is known, but the
Page
more distinct regimes. In this study, Tsay delay d, is unknown (Tsay, 1998).
(1998) multivariate threshold autoregression
(MTAR) approach will be utilised. To In this study, the output gap is chosen as the
specify theof MTAR
specification model,autoregressive
the general we begin by the modelthreshold and isvariable a piecewise to determinelinear model whether in the threshold
specification of the general autoregressive the economy is undergoing an expansion or
for model
a variable
for a𝑦𝑦𝑡𝑡variable
that takes
yt the
thatform;
takes the form; downturn. spaceThe 𝑧𝑧𝑡𝑡−𝑑𝑑reasons
, but it to is nonlinear
employ theinoutput time when s > 1.
gap instead of other variables are manifold.
The model assumes that the threshold variable 𝑧𝑧𝑡𝑡
𝑦𝑦𝑡𝑡 = 𝜃𝜃0 + 𝜃𝜃0 𝑦𝑦𝑡𝑡−1 + … + 𝜃𝜃𝑝𝑝 𝑦𝑦𝑡𝑡−𝑝𝑝 + 𝜀𝜀𝑡𝑡 . The output gap is the measure most commonly
used is to known,
identify but the delay
economic cycles, d, isas unknown
it is (Tsay,
Where εt is the error term. This is a univariate seen not only as reliable ex-post but also
Where 𝜀𝜀 is the error term. This is a univariate 1998).
linear𝑡𝑡 model; however, some data is known as a reliable real-time indicator for policy-
linear model; however,
to exhibit some data
some non-linear That tomakers. More importantly, one argument
is known
trends.
In this study, the output gap is chosen as the
exhibit some non-linear trends. That leads to the
32
introduction ofCentral
theBankthreshold
Of Swaziland © 2018
variables to
threshold variable to determine whether the
economy is undergoing an expansion or
for fiscal policy being more effective in because the ADF statistic is smaller than the
downturns than in expansions is that under MacKinnon critical values for the rejection
a negative output gap, excess capacities of hypothesis for unit roots and therefore
are available in the economy, making the had to be differenced to induce stationarity.
crowding out of private investment lower. This means that the null hypothesis for unit
This argument is expected to hold as long root is not rejected for these variables.
as the output gap is negative, which can
hardly be captured by other variables. These 4.1 Cointegration Results
equation specifications will be estimated After determining the order of integration of
in two fold; aggregated and disaggregated the variables, the next step is to determine
components of spending. This study used whether there is cointegration between the
annual data from 1980 to 2016 to examine variables. This is to establish if the linear
the effect of fiscal multipliers both in times relationship of the variables is stationary.
of recession and expansion in Swaziland. If the null hypothesis of no cointegration is
Data was collected from the Central Bank of rejected then the linear combination of the
Swaziland, the Central Statistics Office, and variables is stationary, hence a non-spurious
the Ministry of Finance. long-run relationship exists between the
variables and as such, consistent estimates
4.0 FINDINGS AND DISCUSSIONS of the long run relationship is evident. To test
Stationarity tests are the pre-tests for for cointegration between these variables,
avoiding spurious regressions. They are the the Johansen approach was employed. Using
starting point in any cointegration analysis as the lag length selection criteria, a lag length
well as regression analysis. In non-stationary of 3 was selected. Tthe results, it is evident
series, the order of integration is therefore that the variables are cointegrated (there is a
determined by the number of times it has to long-run relationship amongst the variables),
be differenced to attain stationarity. All the as there are cointegrating equations in both
variables were found to be nonstationary at the trace statistic and maximum eigenvalue
their levels, and had to be differenced. The statistic. In that regard, we proceed to
ADF test results for the first differences are estimate the SVAR for both aggregated and
presented in the table below. disaggregated data. Diagnostic tests were
carried out and the model passed all the
Table 2: Unit Root Tests Results (first difference) diagnostic tests as shown in the table below,
Variable Intercept Trend and None
where a rule of thumb is that the probability
Intercept should be greater than 0.05.
Log RGDP -4.239*** -3.693** -2.933***
Table 3: Results of Diagnostic Tests
Log -6.065*** -4.498*** -3.660***
Revenue Significance X2 statistic Probability
Log Expend -6.145*** -6.012*** -0.612 Breusch–Godfrey serial 2.98 0.24
Note: ***,**,*= significant at the 1%, 5%, 10% level. correlation LM test
White 0.53 0.63
A variable is stationary if the ADF statistic is Heteroskedasticity test
greater than the MacKinnon critical values Jarque–Bera test 0.65 0.56
for the rejection of hypothesis for a unit Ramsey RESET test (log 0.14 0.77
root. From the table above, all the variables likelihood ratio)
were previously not stationary at their levels Source: Own estimations

33
The paper begins by considering the effects of Although it starts on a negative trajectory,
revenue in the SVAR linear model with no regime positive effects are observed after the third year,
shifts, following the basic specification of showing that the government starts reaping
Blanchard and Perotti (2002), but ordering taxes expenditure benefits after about three years in
(T)4.2
first, followedResponse
Impulse by expenditure (G) for
Analysis and the
output the
theform of taxes. starts
government GDP onreaping
the other hand also
expenditure
4.2.1 Response of GDP and expenditure to a response of revenue to an increase in spending is
(Y).Effects
Figureof Revenue
6 displays and Expenditure
a summary on
of the impulse benefits to
responds after
the about three
increase years inafter
in spending the three
form
revenue shock
Output generally insignificant
of taxes. GDP on the in other
the ten-year horizon.
hand also responds
response from the SVAR of GDP and expenditure years as shown in the second diagram of Figure 7.
The paper begins by considering the effects of to the increase
Although it starts in
onspending after
a negative three years
trajectory,
to a4.2.1
shockResponse of The
on revenue. GDPimpulse
and expenditure
responses of This is in line
as shown in with
the the Keynesian
second theory
diagram of that an
Figure
revenue in the SVAR linear model with no regime positive effects are observed after the third year,
to a revenue shock 7. This is
GDP and following
shifts,paper
government spending to a shock ofin increase in in line with
spending theaccelerate
may Keynesian theory
economic
The beginsthe basic specification
by considering the effects showing
that anthat the government
increase starts
in spending mayreaping
accelerate
revenue
of revenue
Blanchard yields
and in different
Perotti SVAR results,
the (2002), linear
but ordering with
model taxes a
with growth in the
economic
expenditure long run.
growth
benefits in the
after long
about run.years in
three
no regime
pronounced shifts, effect
significant following the basic
(T) first, followed by expenditureon(G)expenditure and output the form of taxes. GDP on the other hand also
specification of Blanchard and Perotti Figure
Figure 7:
7: Response
Response of
of Revenue
Revenue and
and GDP
GDP to
to aa
compared
(Y). Figure
(2002), to
but almost
6 ordering
displays insignificant
a taxes
summary (T)effect thetoimpulse
offirst, GDP. A
followed responds
Spendingto Shock
the increase in spending after three
Spending Shock
by
positiveexpenditure
responseshock fromintherevenue (G)
SVAR and output
of(taxes)
GDP (Y).
andresults Figure
expenditure to an 6 years as shown inResponse
the second
to Cholesky Onediagram
S.D. Innovations ±of Figure 7.
2 S.E.
displays
to a shock
increase
aonsummary
in government revenue. The of the
spendingimpulse impulse
asresponses
response
depictedofin This.10 is in line with the Keynesian
.03
Response of LREV to LEXP
theory that an
Response of LRGDP to LEXP
from the SVAR of GDP and expenditure to a

GDP
firstand
theshock diagram,government but is not spending
generally to a shock in increase in spending may accelerate economic
impulsesignificant
.05 .02
on revenue. The responses
revenue yields different results, with a growth
.00
in the long run. .01
to of GDPrevealing
GDP, and government that the spending revenue has to abeen shock
in revenue significantyields different effect onresults, with a
-.05 .00
pronounced expenditure
generated by the economy, hence a downward Figure 7: Response of Revenue and GDP to a
pronounced
compared to almost significant effecteffect
insignificant on expenditure
to GDP. A
-.10 -.01
Spending Shock
trend. However, the
compared to almost insignificant impact is felt in the effect laterto -.15
1
-.02
2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
positive shock in revenue (taxes) results to an Response to Cholesky One S.D. Innovations ± 2 S.E.
GDP.
years A upward
as an positivetrajectory shock in revenuein (taxes)
is observed GDP. Source: Authors Calculations
Response of LREV to LEXP Response of LRGDP to LEXP
Source: Authors Calculations
results to an increase inas depicted
increase in government spending government in .10 .03
spending as depicted in the firstand diagram, 4.3 Effects of revenue and components of
the first diagram, but is not generally GDP tobut
significant
.05 .02
Figure 6: Response of Expenditure
is noton generally 4.3 Effects (capital
of revenue and components
Revenuesignificant to GDP, revealing expenditure and recurrent) on output
.00 .01
a Shock
to GDP, revealing that the revenue has been
that the revenue has been generated by of expenditure (capital and recurrent) on
-.05 .00
Response to Cholesky One S.D. Innovations ± 2 S.E.
generated
the economy, by the economy,a hence
Response of LEXP to LREV hence downward a downward trend.
Response of LRGDP to LREV
output
4.3.1
-.10
Shock on revenue -.01
However,
trend. However,
.16
the impact the impact is felt is infeltthe in later
the later
.02
years -.15
1 2 3 4 5 6 7 8 9 10
-.02
1 2 3 4 5 6 7 8 9 10
as
.12
an upward trajectory is observed in GDP. 4.3.1
In this
Shock
Authorssection,
on revenue
Calculations expenditure was disaggregated
years as an upward trajectory is observed in GDP. .01
Source:
.08 In this section, expenditure was
Figure 6:Response
Responseofof Expenditure
.00
into
4.3 Effectscapital
of (investment)
revenue and and
components
disaggregated into capital (investment) and recurrent
of
Figure 6:
.04
Expenditure andand GDPGDP to to
aa Shock
Shockon
.00 onRevenue
Revenue -.01
recurrent(capital
expenditure
(consumption) (consumption)
to and totheir
recurrent)
ascertain ascertain
on output
impacts their
to
Response to Cholesky One S.D. Innovations ± 2 S.E. impacts to revenue and GDP. As shown in
revenue and GDP. As shown in Figure 8,
-.04 -.02
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of LEXP to LREV Response of LRGDP to LREV Figure 8, whenever there is a positive shock
4.3.1 Shock on revenue
Source: Authors Calculations.
.16 .02
whenever
in revenue, therecapital
is a positive shock inresponds
expenditure revenue,
.12
4.2.2 Response of GDP and revenue to an Incapital this section,however

positively, expenditureto was
ashockdisaggregated
lesser extent than very signific
.01
.08 significantly to the revenue

expenditure responds in the ten-year
positively, however
.00
recurrent expenditure
into capital (investment) and recurrent where the positive
expenditure shock
.04
horizon.
to a lesser extent pronounced.
than recurrentGDP expenditure be a result o
.00
-.01 shock
(consumption) is largely
to ascertain their impacts on
to the
other the
where hand does not
positive shockrespond significantly
is largely pronounced. to as a sizable
Figure 7 displays the responses of revenue and
-.04 -.02
revenue and GDP. As shown in Figure 8,
the revenue shock in the ten-year horizon.
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
goes towar
GDP on the other hand does not respond
Source: Authors Calculations.
GDP to an increase in government spending. The
Source: Authors Calculations whenever there is a positive shock in revenue,
Figure 8: Response of Expenditure The positive
4.2.2 Response of GDP and revenue to an Figure
capital 8: Response of Expenditure Components
4.2.2
Central Response
Bank of©GDP
of Swaziland 2018and revenue to an Components and GDP to a Revenue however
expenditure responds positively, Shock 38 |
P a expenditure
ge and GDP to a Revenue Shock not result to
expenditure shock
shock to a lesser extent Responsethanto Cholesky
recurrent
One S.D. Innovations ± 2 S.E. expenditure
Figure 7 displays the responses of revenue where the positive shock is largely pronounced. Response of LCAP_EXP to LREV Response of LREC_EXP to LREV Response of LRGDP to LREV and GDP. T
.3 .12 .03
FigureGDP
and 7 displays
to an the increase
responses of
inrevenue and
government .2 .02 recurrent e
to an GDP on the other hand does not respond
.08
spending. The response

GDP to an increase of revenue
in government spending. The
and leads to
.1 .01
.04
increase in spending is generally insignificant

.0 .00
in the ten-year horizon. Although it starts on

.00
-.1 -.01
Page
Figure 10:
a negative trajectory, positive effects are -.2
1 2 3 4 5 6 7 8 9 10
-.04
1 2 3 4 5 6 7 8 9 10
-.02
1 2 3 4 5 6 7 8 9 10
Recurrent E
observed after the third year, showing that Source: Source: Authors
Authors Calculations
Calculations
Response of LREV to LR
4.3.2 Shock on Capital Expenditure .12
34
.08
Whenever there is a positive shock on capital .04
.00
expenditure, there is no immediate significant

-.1 -.01
-.2 -.04 -.02

Figure 10: Response of the Variables on
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Recurrent Expenditure
C E N T R A L B A N K O F S WA Z I L A N D | R E S E A R C H B U L L E T I N VResponse
O L toUCholesky
M EOne S.D.2Innovations ± 2 S.E.
Response of LREV to LREC_EXP Response of LCAP_EXP to LREC_EXP Response of LRGDP to LREC_EXP
4.3.2 Shock on Capital Expenditure .12 .2 .010
.08 .005
.1
Whenever there is a positive shock on capital .04

.0
.000
4.3.2 Shockthere
expenditure, on Capital Expenditure
is no immediate significant 4.4 Response of disaggregated expenditure
.00
-.1
-.005
Whenever there is a positive shock on (economic, social, and general) on a

-.04 -.010
impact
capitalon revenue and there
expenditure, recurrent
is noexpenditure,
immediate
-.08
revenue shock
1 2 3 4 5 6 7 8 9 10
-.2
1 2 3 4 5 6 7 8 9 10
-.015
1 2 3 4 5 6 7 8 9 10
significanta impact
although fall in on revenueexpenditure
recurrent and recurrentis Government spending was further
expenditure,
observed in Figurealthough a fall Notable
9 as expected. in recurrent
is the disaggregated to three components; general
expenditure is observed in Figure 9 as services (general administration, public
positive response in GDP, which is significant 4.4 Response of disaggregated expenditure
expected. Notable is the positive response order and safety), social services (education
(economic, social, and general) on a revenue
after three
in GDP, years.isThat
which shows that
significant expenditure
after in
three years. and health), and economic services
shock
That shows
investment bythat expenditure
the government hasinaninvestment
impact on (agriculture, industry, and mining). The idea
by the government has an impact on GDP, is to identify
Government the impact
spending of each
was further component
disaggregated
GDP, compared to consumption expenditure.
compared to consumption expenditure. to revenue and GDP. First to be examined are
to three components; general services (general
the response of the expenditure components
Figure 9: Response of the Variables on Capital administration,
Figure 9: Response of the Variables on Capital
Expenditure to a positive public shock order and safety),
on revenue. The social
results
Expenditure in Figure 11 shows that the
services (education and health), and economicresponse is not
Response of LREV to LCAP_EXP Response of LREC_EXP to LCAP_EXP Response of LRGDP to LCAP_EXP very significant
services (agriculture, in all the three
industry, components,
and mining). The
.10 .08 .04
however social and economic servicesResearch showsBulletin V
.05 .04
.03
idea is to identify
a positive responsethe impact
in theoffirst
eachyears,
component
which
.02
.00 .00
the first years, which shows that they do get mul
-.05 -.04
.01
shows
to revenue thatandtheyGDP. doFirstget positive
to be examinedspill
are overs
the
.00
positive
from the spill overs from the improved revenue. mea
-.10 -.08
-.01 response ofimproved revenue.
the expenditure components to a
-.15 -.12 -.02
Lila
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
positive
Figure shock
Figure 11:11: on Response
revenue.
Response The of
results
of Expenditure in Figure
Expenditure
Components to fisca
Components
11 toRevenue
shows that the Revenue
response is not very significant
4.3.3
4.3.3Shock
Shockonon
recurrent expenditure
recurrent expenditure Response to Cholesky One S.D. Innovations ± 2 S.E. imp
in allResponse
theof LGEN_SERV
three to LREV
components, howeverResponse
Response of LSOC_SERV to LREV
social and
of LECON_SERV to LREV
Research Bulletin
A Volume 2
positive shock to recurrent expenditure .3
economic services shows a positive response in
.12 .20 con
A positivetoshock
results to recurrent expenditure
a positive results
as shown response toThat
revenue, .15
e ten-year very significant, in Figure 10. could .2 .08
.10 the
although
to a positivenot very significant,
response as shown
to revenue, although notin
be a result of taxes to the government employees .1 .04 .05
inte
Figure 10. That could be a result of taxes .00
Central Bank of Swaziland © 2018 .0 .00

39 |
as
toa agthe
P e
sizable componentemployees
government of recurrent as
expenditure
a sizable -.05
incr
-.1 -.04 -.10
component
goes towards oftherecurrent expenditure
compensation goes
of employees.
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
outp
towards the compensation of employees. Source:
Source:Authors
AuthorsCalculations
Calculations
penditure The positive shock on recurrent expenditure does cum
hock The positive shock on recurrent expenditure 4.4.1
not
does result
nottoresult
a significant
to aresponse to investment
significant response 4.4.1 Response
Responseofof GDP
GDP to
to components
components ofof
expenditure fisca
expenditure
and GDP. That is because a positive shock toa
to investment and GDP. That is because
Whenever tota
Wheneverthere is aispositive shockshock
in eachinofeach
the
onse of LRGDP to LREV
positive shock to recurrent expenditure there a positive

recurrent expenditure crowds out investment of thecomponents
three three components of expenditure,
of expenditure, it does notit a pr
crowds out investment and leads to reduced
and leads togrowth.
economic reduced economic growth. does not have a significant impact to GDP.
have a significant impact to GDP. However, it is
However, it is observable in Figure 12 that
Figure 10:
10:Response
Responseof of observable
there is a inpositive
Figure 12 that there
response to isGDP
a positive
arising For
thethe Variables
Variables on on
4 5 6 7 8 9 10
Recurrent
Expenditure from a positive
response shockfrom
to GDP arising in economic services
a positive shock in end
expenditure, albeit insignificant. That shows
economic services expenditure, albeit mea
.12
Response of LREV to LREC_EXP
.2
Response of LCAP_EXP to LREC_EXP
.010
Response of LRGDP to LREC_EXP
the need for the government to increase its
.08 .005
insignificant.
expenditure That shows services.
in economic the need for the resp
.1
on capital .04
.0
.000 government to increase its expenditure in perc
.00 -.005
significant -.04
-.1
-.010
economic services. perc
penditure, -.08
1 2 3 4 5 6 7 8 9 10
-.2
1 2 3 4 5 6 7 8 9 10
-.015
1 2 3 4 5 6 7 8 9 10
con
Figure 12: Response of GDP to Disaggregated
diture is Source: Authors Calculations Expenditure Shocks corr
able is the ave
significant 4.4 Response of disaggregated expenditure GDP
nditure in
(economic, social, and general) on a revenue
shock
35 elas
impact on
Figure 12:expenditure,
Response of GDP to Disaggregated
convert these
measured elasticities the to multiplier units, we
economic services
Figure 12: Response convert
Expenditure of GDPthesetoelasticities
Shocks Disaggregated
albeit
to GDP
multiplier
overunits, the inwe logarithms,
estimation
correct impulse period. obtained
It is known
response impulse
that by the
functions
GDP to Disaggregated correct impulse response functions by the
Expenditure Shocks response by functions are elasticities
insignificant. That correct shows impulse the needresponse for the functions
C E N T R A L B A N K O F S W A elasticity ZILAND |𝛽𝛽 can
the average
R E Sbe
E A Rdefined
C H B U L Las
ratios of themeasuring
ETIN VOLUME 2
respectivethe fiscal variable and
government to increase its expenditure in average
percentage ratios of
change thein respective
output in fiscal
response variable
to and
one
average ratios of the respective fiscal variable and GDP over the estimation period. It is known that
GDP over the 𝑋𝑋𝑡𝑡 Δ𝑌𝑌𝑡𝑡inperiod.
estimation It isvariables.
known that
economic services. GDP over the estimation period. Itpercentage is known that point change
elasticity 𝛽𝛽= the𝛽𝛽fiscal
can be defined as To
elasticity 𝛽𝛽
convert these elasticitiescan be𝑌𝑌 Δ𝑋𝑋
defined
𝑡𝑡 as
𝑡𝑡 to multiplier units, we
Figure elasticity 𝛽𝛽 can be defined as Where β is a percentage. Hence𝑋𝑋𝑡𝑡 Δ𝑌𝑌𝑡𝑡 = 𝛽𝛽
Figure12: 12: Response
Response of of GDP
GDP to to Disaggregated
Disaggregated 𝑋𝑋𝑡𝑡 Δ𝑌𝑌Hence
Expenditure
ExpenditureShocks
thors Calculations Shocks 𝑋𝑋𝑡𝑡 Δ𝑌𝑌𝑡𝑡 Where 𝛽𝛽
correct is a percentage.
impulse response 𝑡𝑡
= 𝛽𝛽functions 𝑌𝑌𝑡𝑡 Δ𝑋𝑋𝑡𝑡 by the
ulletin Volume 2 = 𝛽𝛽 𝑌𝑌𝑡𝑡 Δ𝑋𝑋𝑡𝑡
𝑌𝑌𝑡𝑡 Δ𝑋𝑋𝑡𝑡 average ratios ofWhere Δ𝑌𝑌 𝑋𝑋fiscal
𝛽𝛽 is a percentage.
the𝑡𝑡respective Henceand
variable
Where 𝛽𝛽 is a percentage. Hence 𝑡𝑡
calmultipliers.
Multipliers When put
Where 𝛽𝛽 is a percentage. Hence
= 𝛽𝛽 ÷
simply, fiscal multipliers GDP over the estimation Δ𝑋𝑋Δ𝑌𝑌𝑡𝑡 period. 𝑌𝑌 ItΔ𝑌𝑌
𝑋𝑋𝑡𝑡𝑡𝑡
is𝑡𝑡 known 𝑋𝑋that
= 𝛽𝛽 ÷
𝑡𝑡
4.5 Fiscal Multipliers 𝑡𝑡
= 𝛽𝛽 ÷ Δ𝑋𝑋 𝑌𝑌
multipliers Δ𝑌𝑌𝑡𝑡 𝑋𝑋𝑡𝑡
measureinthe thischange
study are different from
4.5 Fiscal Multipliers 𝑡𝑡 𝑡𝑡
Fiscal in outputinarising
multipliers this
Δ𝑋𝑋
= 𝛽𝛽from
study ÷are
Where
𝑌𝑌
aelasticity
𝑋𝑋𝑡𝑡
different is
from
𝛽𝛽 can be defined
expressed Δ𝑋𝑋𝑡𝑡
as
as 𝑌𝑌𝑡𝑡
𝑋𝑋𝑡𝑡 a constant and it is the
Fiscal multipliers in this study are different 𝑡𝑡 from 𝑡𝑡 𝑌𝑌𝑡𝑡 𝑋𝑋 Where𝑋𝑋𝑡𝑡 Δ𝑌𝑌 is expressed as a constant and it is the
estudy
response functions
Lilangeni change in
are different from in the
expenditure
impulse response
𝑋𝑋 𝑡𝑡
sense or that
revenue.
functions in The
the Where 𝑌𝑌𝑡𝑡 isisexpressed
Where
sense that expressed 𝑡𝑡𝑡𝑡 =
𝑌𝑌as a as
constant
𝛽𝛽 a constant and it is andthe
impulse responseWhere is expressed as a that
constant and it is the 𝑌𝑌 Δ𝑋𝑋
𝑡𝑡
functions in the sense average is proportion
it averagethe proportionaverage of
average 𝑡𝑡 variable
proportion proportion𝑋𝑋𝑡𝑡ofvariable
𝑡𝑡 to output
variable 𝑋𝑋𝑡𝑡 to𝑌𝑌𝑡𝑡output
. 𝑌𝑌𝑡𝑡 .
of variable 𝑋𝑋of
𝑌𝑌𝑡𝑡
eons
responses
in the sense
fiscal measure
multipliers can a percentage
that impulse
be responseschange
categorised measure
into a percentage
three: (i)Where change 𝛽𝛽 is a percentage. Hence 𝑡𝑡 to output 𝑌𝑌𝑡𝑡 .
impulse
Source: Authors responses
Calculations measure
average a percentage
proportion change 𝑋𝑋𝑡𝑡toto output
of variable output 𝑌𝑌𝑡𝑡 .. These These averages for revenue
ure a percentage change compared to a unit change measured TheseThese averages
by fiscal averagesfor for revenue
averages
revenue and
for
and expenditure
revenue
expenditure
and expenditure
edimpact
to a unitcompared change to a unit
multipliers, measured
These change
(which
averages by fiscal
measured
forshow by fiscalthe
revenue and expenditure
and expenditure
Δ𝑌𝑌 𝑡𝑡 (including 𝑋𝑋 𝑡𝑡 expenditure
4.5Fiscal
Fiscal Multipliers = 𝛽𝛽 ÷
4.5
nge measured Multipliers
by fiscal Central Bank of Swaziland © 2018 components) forΔ𝑋𝑋 the 𝑡𝑡 estimation 𝑌𝑌𝑡𝑡 period from 40 |
Central Bank of PSwaziland © 2018 40 | 40 |
Bank contemporaneous
of Fiscal
Swaziland
Fiscal © 2018
multipliers
multipliers effect
gin
ain this
ethis of
studystudyone are unit
are
different increase
differentfrom in
1980 to 𝑋𝑋 2016 are shown in table 5.
2018 Page Where 𝑡𝑡40is| expressed as a constant and it is the
from impulse
impulse response
response
functions
functions
in the
in
sense that
the 𝑌𝑌𝑡𝑡
the sense
respective fiscal variable
that impulse responses measure a Table on output), (ii) the 5: proportion
Ratio of Each Component to GDP𝑌𝑌𝑡𝑡in
average of variable 𝑋𝑋𝑡𝑡 to output .
impulse
percentage responses
change measure compared a percentage
to achange
unit the Estimating Horizon (1980 to 2016)
interim multipliers (show the effect of one unitThese averages for revenue and expenditure
change
compared measured
to a unit bychange
fiscal multipliers.
measured by When fiscal REV EXP CAP_ REC_ ECON_ GEN_ LSOC_
increase in thefiscal
put simply, respective fiscal
multipliers variable
measure the on EXP EXP SERV SERV SERV
change in output arising from a Lilangeni 0.180 0.199 0.043 0.156 0.0847 0.066 0.034
output
P a g ein the medium-term). Finally, theSource: Own calculations
change in expenditure or revenue. The fiscal
cumulative multipliers
multipliers is defined into
can be categorised as the sum ofFor example, the ratio of average revenue
three:
(i) impact multipliers, (which show the to average GDP for the period 1980 to 2016
fiscal multipliers through
contemporaneous effect aof horizon (shows the
one unit increase is 0.18 as shown in Table 5. Dividing the
in the respective fiscal variable on output),
total effect of fiscal policy changes to output overimpulse response value of 0.0019 in Table 6
(ii) the interim multipliers (show the effect by this ratio gives an impact multiplier (first
a pre-defined
of one unitperiod.
increase in the respective fiscal year) of 0.01055 in the interim multiplier
variable on output in the medium-term). column. Summing the interim multipliers
Finally, the cumulative multipliers is defined cumulatively gives the accumulated
For as estimation
the sum of fiscal multipliers
purposes, giventhrough
that a themultipliers as shown in the fourth column.
horizon (shows the total effect of fiscal
endogenous variables
policy changes used in
to output thea estimations
over pre-defined areTable 6: Revenue and Expenditure Multipliers
period. in logarithms, the obtained impulseto GDP
measured
Period REVENUE
response functions are
For estimation elasticities
purposes, givenmeasuring
that the the (Yr) IMPULSE INTERIM ACCM MLTP
endogenous variables used in the estimations
percentage changeininlogarithms,
are measured output in the
response
obtainedto one 1 0.00190 0.01055 0.01053
2 0.00097 0.00537 0.01591
impulse point
percentage response functions
change are elasticities
in the fiscal variables. To 3 0.00189 0.01047 0.02638
measuring the percentage change in output
convert these elasticities to multiplier units, we 4 -0.00368 -0.02041 0.00597
in response to one percentage point change
in the fiscal variables. To convert these 5 -0.00254 -0.01407 -0.00810
correct impulse response functions by the 6 0.00013 0.00070 -0.00740
elasticities to multiplier units, we correct
average ratios
impulse of the respective
response functions byfiscal
thevariable
average and 7 0.00300 0.01662 0.00922
ratios of the respective fiscal variable and 8 0.00530 0.02938 0.03860
GDPGDPoverover
thethe
estimation
estimationperiod. It Itis isknown
period. knownthat 9 0.00703 0.03898 0.07758
elasticity 𝛽𝛽 can beβdefined
that elasticity can be as
defined as 10 0.00614 0.03401 0.11160
𝑋𝑋𝑡𝑡 Δ𝑌𝑌𝑡𝑡
= 𝛽𝛽
𝑌𝑌𝑡𝑡 Δ𝑋𝑋𝑡𝑡
Where 𝛽𝛽 is a percentage. Hence
36 Δ𝑌𝑌
Δ𝑋𝑋𝑡𝑡
= 𝛽𝛽 ÷
𝑋𝑋
Central𝑡𝑡Bank Of Swaziland
𝑌𝑌𝑡𝑡
𝑡𝑡 © 2018

The expenditure multiplier shows the gains
for the Period4 0.009207 EXPENDITURE
0.046461 0.023354
(Yr)5 0.011604
IMPULSE 0.058557 0.081911
INTERIM ACCM MLTP
accrued from government spending, which
re shown rises to 20 cents in year ten compared to
1 6 0.011003
-0.00461 0.055524
-0.02325 0.137435
-0.02325
7 0.00695 0.035071 0.172506 11 cents for revenue. Table 7 shows the
2 -0.00272 -0.01372 -0.03697
8 0.002697 0.01361 0.186116 multipliers for expenditure disaggregated to
o GDP in 3 0.002747
0.001102 0.013862
0.005561 -0.02311
0.191677 capital and recurrent. The impact multipliers
9
) 410 0.009207
0.001836 0.046461
0.009265 0.023354
0.200942 are negative for both recurrent and capital
5 estimations
Source: Own 0.011604 0.058557 0.081911 expenditure.
LSOC_S
ERV 6 0.011003 0.055524 0.137435
Taking these multipliers into perspective, the Table 7: Multipliers for Capital and Recurrent
7 0.00695 0.035071 0.172506
0.034 impact
8 multiplier (year one)
0.002697 is 0.01055
0.01361 for
0.186116 Expenditure
9 while 0.001102
revenue it is -0.023 0.005561 0.191677
for expenditure. That CAP_EXP
Period
venue to 10 0.001836 0.009265 0.200942 IMPULSE INTERIM ACCM MLTP
means for estimations
Source: Own every additional Lilangeni used by the
1 -0.00613 -0.14232 -0.14232
6 is 0.18 government today, that result to a fall in GDP of 2 -0.00422 -0.09797 -0.24029
impulse Taking these multipliers into perspective, the 3 0.004749 0.11033 -0.12996
about 2 cents (-0.02325 x 100). Similarly, for
impact multiplier (year one) is 0.01055 for
this ratio 4 0.014 0.32525 0.195291
every
revenueadditional
while it Lilangeni
is -0.023of revenue generated
for expenditure.
5 0.020916 0.48592 0.681220
0.01055 That means
today, leads tofor everyrise
a 1cent additional Lilangenix
in GDP (0.01053 6 0.019968 0.46390 1.145124
ming the used by the government today, that result
100).
to a On
fallthe
in cumulative
GDP of aboutmultipliers,
2 cents an (-0.02325
additional 7 0.016243 0.37736 1.522488
ves the x 100).used
lilangeni Similarly,
today willforresult
everyto anadditional
11 cents 8 0.01043 0.24231 1.764801
he fourth Lilangeni of revenue generated today, leads 9 0.005859 0.13611 1.900920
(0.11160 x 100) and 20 cents (0.20094 x 100)
to a 1cent rise in GDP (0.01053 x 100). On 10 0.004207 0.09773 1.998659
rise
the incumulative
GDP in year multipliers,
10, arising froman revenue and
additional Period REC_EXP
lilangeni used
expenditure today will result to an 11 cents
respectively.
ultipliers IMPULSE INTERIM ACCM MLTP
(0.11160 x 100) and 20 cents (0.20094 x 100)
rise in GDP in yeargraphically
10, arisingthe from revenue 1 -0.00025 -0.00163 -0.00163
Figure 13 shows cumulative
and expenditure respectively. 2 0.001809 0.011637 0.010009
multipliers for revenue and expenditure. The 3 0.001672 0.010755 0.020765
M
P figure
Figureshows that expenditure
13 shows graphically multipliers starts
the cumulative 4 0.005455 0.03509 0.055855
53
multipliers
on for revenue
the negative, which is and
trueexpenditure.
in the sense The
that 5 0.005753 0.037007 0.092862
91
38 figure shows that expenditure multipliers 6 0.005753 0.037007 0.129869
when
startsthe
ongovernment
the negative,spends, it runs
which down
is true inGDP,
the
97 7 0.006603 0.042475 0.172345
810 sense
but the that when starts
multipliers the government spends,
being positive it
after the 8 0.006269 0.040327 0.212671
740 runs down GDP, but the multipliers starts 9 0.007463 0.048007 0.260678
22 third year.
being positive after the third year. 10 0.008779 0.056473 0.317151
60
Source: Own estimations
58 Figure 13: Revenue and Expenditure Accumulated
Figure 13:to
Multipliers Revenue
GDP and Expenditure
60
Accumulated Multipliers to GDP However, it can be noted from the table
0.3 that the multipliers for capital expenditure
0.2 becomes positive after year 3, which is
0.1 the estimated duration of most capital
CM 0 projects, compared to year 2 for recurrent
TP -0.1 1 2 3 4 5 6 7 8 9 10 expenditure. Furthermore, the returns from
0.02325
capital expenditure are more pronounced
0.03697 Expenditure Multipliers Revenue Multipliers
0.02311
than recurrent expenditure as shown in
Source:
Source:Own
Ownestimations
estimations
Figure 14.
41 |

37
ch Bulletin Volume 2
7 0.2627 0.8771 It should b
ns pronounced than recurrent
C Eexpenditure
N T R A L B A N KasOshown
F S WA Z I L A N D | RESEARCH BULLETIN VOLUME 2
8 0.2449 1.1221
es in Figure 14. service co
9 0.2135 1.3356
or 10 0.2126 1.5482 order, safe
Figure 14: Capital and Recurrent Expenditure Period (Yr) SOC_SERV
or Figure 14: Capital and Recurrent Expenditure of educat
Accumulated Multipliers to GDP Period INTERIM SOC_SERV
ACCM MLTP
nd Accumulated Multipliers to GDP 1 (Yr) -0.0529
INTERIM -0.0529
ACCM MLTP services. E
3 2 -0.0487 -0.1016
or 1 -0.0529 -0.0529 consists
3 2 0.0807 -0.0209
2 -0.0487 -0.1016
transport
4 0.0775 0.0566
3 0.0807 -0.0209
1 5 0.0681 0.1247 governmen
4 0.0775
-0.0109 0.0566
nt 6 0.1137
0 7 5 0.0681
-0.0160 0.09780.1247 economic
1 2 3 4 5 6 7 8 9 10 8 6 0.1029
-0.0109 0.20060.1137 most drive
-1
9 7 0.2070 0.40760.0978
32 Capital Expenditure 0.2510 services ar
10 8 0.65870.2006
29
Recurrent Expenditure Source: Own estimations
9 0.4076 of buildin
96
91 Source:
Source:OwnOwn
estimations
estimations From the10table, it is evident that the most driver
0.6587 economic
20 Source: Own estimations
The figure shows that an additional Lilangeni of the capital expenditure multiplier are the
24 4.6 Fiscal
The figure shows that an additional Lilangeni
88 used From the servises
economic table, it is evident an
whereby that additional
the most
01
usedinincapital expenditure
capital todaytoday
expenditure will result
will to E2
result and expan
driver ofused
Lilangeni thetoday
capital
willexpenditure multiplier
result to an increase of
20 to E2 emalangeni
emalangeni increase inincrease
GDP afterin10GDP
years.after
On the10
are the economic servises whereby an
59 years.hand,
On the other hand, an additional E1.55 in GDPLilangeni
after 10 years. One of the
other an additional lilangeni used in additional usedClosely following
today will resultthe
to
lilangeni used in recurrent expenditure
recurrent expenditure an increase
economic of E1.55
services in GDP
are the afterservices
general 10 years.
at the size of
today will result totoday will result
32 cents to 32in
increase
Closely following the economic services are
GDP after
cents 10 years.
increase in GDPThese
after results
10 years.shows the
These E1.14 cents increase to GDP after 10 years, with and expan
63 the general services at E1.14 cents increase
importance of spending in capital projects the lowest being MTAR mo
09 results shows the importance of spending in to GDP after 10 social
years,services
with theatlowest
66 cents as
being
in increasing the country’s GDP. Hence, the
65 capital projects in increasing the country’s GDP. socialinservices
shown the figureatbelow.
66 cents as shown in the using the
next section further breaks down capital
55 figure below.
expenditure
Hence, the nextto the three
section sectors
further (economic,
breaks down with outpu
62 Figure 15: Accumulated Multipliers for
69 social, and
capital general services),
expenditure to the threeto identify the
sectors model is
Figure 15: Accumulated
Components Multipliers for
of Capital Expenditure
45 one which drives the capital expenditure
(economic, Components of Capital Expenditure
71 multipliers.social, and general services), to disaggrega
2
78 identify the one which drives the capital results of
51 Table 8: Multipliers for Economic, Social, and 1.5
expenditure multipliers. shown bel
General Services Capital Expenditure
1 which will
he TablePeriod ECON_SERV
8: Multipliers for Economic, Social, and
(Yr) INTERIM ACCM MLTP
General Services Capital Expenditure the previo
es 0.5
1 -0.0065 -0.0065
Period (Yr) ECON_SERV
ed 2 -0.0116 -0.0180 0 Table 8: T
INTERIM ACCM MLTP
to 1 3 -0.00650.0322 -0.0065 0.0142 1 2 3 4 5 6 7 8 9 10 for Aggre
2 4 -0.01160.1109 -0.0180 0.1251 -0.5
e,
3 5 0.03220.2316 0.0142 0.3566 Econ_Serv Gen_Serv Soc_Serv
re Variab
4 6 0.11090.2578 0.1251 0.6144
5 0.2316 0.3566 Source:
Source: OwnOwn estimations
estimations
7 0.2627 0.8771
6 0.2578 0.6144
8 0.2449 1.1221
It should be noted at this stage that
9 0.2135 1.3356
42 |
general public service consist of general
Central Bank of Swaziland © 2018
10 0.2126 1.5482
P administration,
age public order, safety
and defence. Social services consist of
education, health, and other community
services. Economic services on the other

hand consists of agriculture, industry, and Shin, 1997). The test finds parameter
mining, transport and communications. instability if the cumulative sum goes
That means the government should invest outside the area between the two critical
more on the capital economic services, lines. The figure below plots the results
which were found to be the most drivers of for CUSUM and CUSUMSQ tests. The results
the economy. Although low, social services indicate the absence of any instability of the
are also very important as they consists of coefficients because the plot of the CUSUM
building schools and hospitals, but their and CUSUMSQ statistic fall inside the critical
economic significance is low in the medium bands of the 5 percent confidence interval
term. for parameter stability.
4.6 Fiscal Multipliers in times of recessions Figure 16: Plot of the CUSUM and CUSUMSQ
and expansions Statistic
One ofLREV(-3)
the major objectives of the study
0.044898 0.014208 3.160071 0.0039 is 16 1.4
1.2
to findLEXP(-3)
the size of fiscal 0.014194
multipliers in times
12
0.076368 5.380471 0.0000 8

1.0
of recessionsC and expansions.

1.815667 0.323710 In doing 0.0000
5.608933 so, 4
0.8
0.6
the study adopted an MTAR model of Tsay

0
0.4
-4
0.2
(1998) andOUTPUT_GAP
estimated it using the Threshold
<= 0.015149999 -- 27 obs
-8 0.0
Regression (TR) approach, with output gap -12
-16
-0.2
-0.4
being the threshold variable. This model 90 92 94 96 98 00 02 04 06 08 10 12 14 16 90 92 94 96 98 00 02 04 06 08 10 12 14 16
LREV(-3) 0.144190 0.041287 3.492352 0.0017 CUSUM 5% Significance CUSUM of Squares 5% Significance
is estimated for both aggregated and

LEXP(-3) 0.176916 0.041935 4.218776 0.0002 Source: Authors Calculations
disaggregated government expenditure. The Source: Authors Calculations
C 1.809452 0.333203 5.430483 0.0000
results of the aggregated model with lag 3
Sincethe
Since the model
model passes
passes the stability
the stability test, it cantest,
be it
are shown below. These results shows the
can be used for further analysis. From the
elasticities which will then be converted used for further analysis. From the results all the
Non-Threshold Variables
results all the coefficients are significant,
to multipliers using the previously stated coefficients are significant, and there are twenty
approach.
LRGDP(-1) 0.843880 0.027086 31.15519 0.0000 and there are twenty seven observations
seven
below observations
the output gap below the output
threshold gap
of 0.01515,
Table 8: Threshold Regression Results for against seven
threshold of 0.01515, above the seven
against threshold.
above the That
Aggregated Data the model, the cumulative sum of means about 79 per cent
threshold. That means about 79 per cent of the of the time
After estimating
Variable Coefficient Std. Error t-Statistic Prob.
between 1980 and 2016 the economy is in
time between 1980 and 2016 the economy is in
recursive residuals (CUSUM) and the CUSUM of recession compared to 21 per cent when it
0.015149999 < OUTPUT_GAP -- 7 obs
recession comparedThe
is in expansion. to 21table
per cent whenshows
below it is inthe
square (CUSUMSQ)
LREV(-3) 0.044898 tests are applied
0.014208 3.160071to assess
0.0039
LEXP(-3) 0.076368 (Pesaran
parameter stability 0.014194and 5.380471
Shin, 1997).0.0000
The
multipliers
expansion. Theobtained
table belowfrom
shows these elasticities
the multipliers
C 1.815667 0.323710 5.608933 0.0000 using the previously stated
obtained from these elasticities using theapproach.
test finds parameter instability if the cumulative
previously stated approach.
sum goes outside <=the
OUTPUT_GAP area between
0.015149999 -- 27 obs the two Table 9: Fiscal Multipliers in Times of
critical
LREV(-3) lines. The figure
0.144190 below plots
0.041287 the results
3.492352 0.0017 Recessions and Expansions
Table 9: Fiscal Multipliers in Times of
LEXP(-3) 0.176916 0.041935 4.218776
for CUSUM and CUSUMSQ tests. The results
0.0002 Variable and Expansions
Recessions Expansion Recession
C 1.809452 0.333203 5.430483 0.0000
indicate the absence of any instability of the
Revenue
Variable
0.2489
Expansion Recession
0.7994
Expenditure 0.3854 0.8928
coefficients because the plot
Non-Threshold of the CUSUM and
Variables Revenue 0.2489 0.7994
LRGDP(-1) 0.843880 0.027086 31.15519 0.0000
CUSUMSQ statistic fall inside the critical bands of Expenditure 0.3854 0.8928
the 5 percent confidence interval for parameter These results shows that multipliers are
After estimating the model, the cumulative higher during times of recession than
stability. These results shows
sum of recursive residuals (CUSUM) and expansion, with that multipliers are
a Lilangeni higher in
increase
the CUSUM of square (CUSUMSQ) tests are expenditure
during bringingthan
times of recession 89expansion,
cents with
to aGDP
applied to assess parameter stability (Pesaran Lilangeni increase in expenditure bringing 89 in
in recessions compared to 39 cents
cents to GDP in recessions compared to 39 cents
in expansions.
recent
These results are in line with
studies that have concluded
39 that
expansions. These results are in line with The results shows that expenditure on capital
recent studies that have concluded that projects far exceed one during recessions,
multipliers are significantly larger when which shows that the magnitude of the gains
the economy is undergoing a recession than on government investment is huge. From
when it is in an expansion (Auerbach and the results, an additional Lilangeni used in
Gorodnichenko, 2012, Batini at al. 2012, capital expenditure results to E1.60 increase
Baum at al. 2012). in GDP during recessions, compared to 51
cents during expansions. Therefore, since it
The nice point to emerge out of this exercise has been found that increasing government
is that during recessions policymakers are spending in periods of recessions would
trying to stimulate the economy in order to stimulate output, much of the expenditure
raise output and employment. The policy should be directed to capital projects.
implication is that increasing government
spending in periods of recessions (as 5.0 CONCLUSION AND
Keynesian considerations would call for) RECOMMENDATIONS
would stimulate output whereas increasing it The major objective of this study was to
in times of expansion would have essentially assess the impact of fiscal policy on output
no effects. Further, since we have made no in Swaziland, with emphasis on the size
distinction between increases and decreases of the fiscal multipliers, including times
in government spending, it would also of recessions and expansions. The SVAR
follow that reducing government spending modelling approach was used to determine
in recessions, as many developing countries linear multipliers, while MTAR was applied
have historically done would be quite for non-linear multipliers (recessions and
contractionary whereas reducing spending expansions). The first step therefore was
in good times would have little effect. to test for stationarity of the variables.
Since the study has found that it is wiser Results of the ADF stationarity test show
to increase spending during recessions, the that the variables are not stationary. The
issue is financing the budget, whereby the Johansen and Juselius cointegration test
country might find itself with a high debt was performed to establish the existence of
to GDP ratio. Thus, policy makers should a long run relationship among the variables,
be careful on the magnitude in which the results of which show the existence of such
spending should be increased. The results a relationship.
are further confirmed when expenditure is
disaggregated into capital and recurrent as Once cointegration was established, the
shown in the table below. SVAR model was estimated and the impulse
response analysis was undertaken. The
Table 10: Fiscal Multipliers in Times of
results shows that the response of GDP is
Recessions and Expansions for Capital and
not significant for revenue but significant
to expenditure. When expenditure was
Variable Expansion Recession
disaggregated to capital and recurrent, the
Revenue 0.2645 0.7487 results shows that GDP response is significant
Capital 0.5129 1.6154 for capital than recurrent expenditure.
Expenditure On further disaggregation of capital
Recurrent 0.3394 0.6058 expenditure, the results show that economic
Expenditure services followed by general services
expenditure drives capital expenditure.

The impulse response functions were then increasing government spending in

used to estimate linear multipliers, where it periods of recessions (as Keynesian
was found that the accumulated multipliers considerations would call for) in order
are higher at 20 cents for expenditure in to stimulate output whereas increasing
the 10 year horizon compared to 11 cents it in times of expansion would have
for revenue multipliers. Disaggregating essentially no effects.
expenditure further to capital and recurrent,
it was found that capital expenditure � The study has found that it is wiser to
multipliers are higher at E2.00, compared to increase spending during recessions, the
32 cents for recurrent expenditure. On the issue is financing the budget, whereby
components of capital expenditure, it was the country might find itself with a high
found that economic services expenditure debt to GDP ratio. Thus, policy makers
has a higher multiplier, at E1.55, followed should be careful on the magnitude in
by general services multiplier at E1.14. which the spending should be increased.
Therefore, a study needs to be
The results for the non-linear multipliers undertaken to ascertain the magnitude of
show that multipliers are higher during this budget expansion to avoid situations
times of recession than expansion, with a whereby the debt to GDP ratios reach
Lilangeni increase in expenditure bringing unsustainable levels.
89 cents to GDP in recessions compared
to 39 cents in expansions. These results � Since the results show that the returns
are in line with recent studies which have from capital expenditure are more
concluded that multipliers are significantly pronounced than recurrent expenditure,
larger when the economy is undergoing a efforts should be made towards spending
recession than when it is in an expansion more on capital projects, with more
(Auerbach and Gorodnichenko, 2012, Batini emphasis on the economic services
et al. 2012, Baum et. al. 2012). The results component of capital expenditure.
are further confirmed when expenditure is
disaggregated into capital and recurrent, � The results further shows that expenditure
where capital expenditure is found to have a on capital projects far exceed one during
multiplier of E1.62 during times of recession times of recessions, with an additional
compared to 51 cents in times of expansions. Lilangeni used in capital expenditure
results to a E1.60 increase in GDP
In light of the findings in the study, the during recessions, compared to 51 cents
following policy recommendations are during expansions. Therefore, much of
offered: the expenditure should be directed to
� The government should continue capital projects during recessions.

41
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and Sergio Rebelo. 2011. “When is
Auerbach, Alan, and Yuriy Gorodnichenko, the Government Spending Multiplier
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Furceri, M. Kumhof, R. Lalonde, D.
Auerbach, Alan J., and Yuriy Laxton, J. Lindé,
Gorodnichenko. 2012. “Measuring the
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A. Senhadji (eds.) (forthcoming; Dynamics in Developing Countries,”
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43
The Efficacy and Potency or Key Words: CMA, Optimum Currency Area,
Paralysis of Monetary Policy in Macroeconomic Convergence, Monetary
Policy, Structural VAR.
Swaziland under the Common
Monetary Union
1. INTRODUCTION
The paper argues that Swaziland’s
Sikhumbuzo S. Dlamini7 ,
membership to the Common Monetary Area
Ntobeko S. Dlamini8 and Sive Kunene9
(CMA) together with Lesotho, Namibia and
South Africa has paid huge dividends for the
Abstract
country over the years. With macroeconomic
stability the principal outcome over the
This paper is a twofold analysis of the
years the country has achieved a stable
effectiveness of monetary policy in Swaziland
currency with the Lilangeni pegged one-to-
and an assessment of the Common Monetary
one with the South African Rand. Under this
Area (CMA) as an optimal currency area
arrangement, the economy has also been
(OCA) using structural vector autoregression
stable. The interlinkages between fiscal
(VAR) models. In assessing the optimality,
and monetary policies have been strong.
the paper identifies the underlying shocks
Monetary policy implementation has yielded
and correlation in the shocks to real gross
positive reviews over the years. The country
domestic product, consumer price index and
has maintained relatively stable levels of
real exchange rate. The results indicated
increase in prices (inflation) as well as a
that demand shocks proxied through the
stable financial sector.
consumer price index are less correlated
among the CMA member states; instead,
Monetary policy has had a measurable and
they have converged around the South Africa
foreseeable impact on demand and inflation
as an anchor economy. The results therefore
over time. Within the confines of lose of
support the Central Bank of Swaziland’s
monetary policy autonomy in a currency
drive to align policy rates with that of South
union, monetary policy may not always be
Africa, but dependent on data outcomes.
effective. This requires central banks to
The impulse response results revealed
continuously innovate in areas such as risk
that a shock on the discount rate only has
management and developing analytical
a negative significant effect on the real
tools to deal with adverse developments,
gross domestic product (GDP), inflation and
including the inherent costs of monetary
money supply (M2), indicating the efficacy
policies, especially those applied in quasi-
of monetary policy in Swaziland.
currency unions such as the CMA.
The paper argues that whilst monetary

integration within the CMA has over time
7
Sikhumbuzo S. Dlamini is the General Manager,
Economic Policy, Research and statistics Department strengthened, the Central Bank of Swaziland
at the Central Bank of Swaziland.,reachable at still retains autonomy to implement monetary
Sikhumbuzod@Centralbank.org.sz. policy as economic fundamentals allow. This
8
Ntobeko Dlamini is an Economist, Modelling and bestows potency of monetary policy to adjust
Forecasting, in the Policy Research and Macroeconomic the levels of money supply to curb inflation
Analysis at the Central Bank of Swaziland.,reachable and restore financial stability. It renders the
at Ntobekod@Centralbank.org.sz.
rhetoric of ‘monetary policy decision taker’
9
Sive Kunene is an Economist, Policy Research, in
the Policy Research and Macroeconomic Analysis at which many believe about monetary policy
the Central Bank of Swaziland.,reachable at Sivek@ decisions in Swaziland as flawed. The paper
Centralbank.org.sz. argues that Swaziland’s monetary policy

slowdown is due to continued drought and a 8
per cent
difficult external environment, especially from 6
4
C E N T R A L B A N K O F S WA Z I L A N D | South
RESEAR C H B Africa,
U L L E T Ileading
N V O L Uto
MEa sharp
2 decrease in South
2
African Customs Union (SACU) revenues. Such a 0
decrease in revenue, combined with increased
independence or autonomy is inherent increased
public publichasspending,
spending, generatedhas generated
higher fiscal
by jurisdiction or national sovereignty. higher fiscal deficits and a growing public
deficits and a growing public debt.
Remaining within the CMA is one such debt. Source
conscious decision in the implementation Figure 1: GDP Growth Rates in Swaziland
of the country’s monetary policy strategy. It Figure 1: GDP Growth Rates in Swaziland Sout
notes various developments in South Africa 8.00% 6.86%
5.99% dete
that had devastating effects to the other 6.00% 4.44% 4.74% 4.25%
3.79%
4.00% (Ndz
economies in the CMA, especially those 1.57%
2.25%
1.46%1.31%
2.00% 0.82% betw
associated with the collapse of the exchange
0.00%
rate. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 thro
Real GDP Growth extr
1.1 Stylised Facts about the Swazi
Economy Source:
Source: Central
Central Statistical
Statistical Office Office Furt
inve
1.1.1 Economic Growth 1.1.2Inflation
1.1.2 Inflation Developments
Developments
finan
During the 1980s Swaziland recorded high The Central Bank of Swaziland has as its
The Central Bank of Swaziland has as its ultimate
economic growth rates, driven by an influx of ultimate goal price stability to create Thes
foreign direct investment (FDI) arising from goal price stability conducive
an environment to create anfor environment
economic and
sanctions imposed on South Africa, which conducive growth. The monetary
for economic authorities
growth. in the
The monetary
propelled the relocations of enterprises into country basically uses monetary policy tools
authorities in the country basically uses monetary
Swaziland. The high levels of foreign direct (namely; the discount rate, reserve ratio and Imp
investment caused an economic upturn in policy liquiditytools (namely; the discount rate, reserve
requirement) to control the level thro
the manufacturing sector, which became the ratio of money supply and
and liquidity consequently
requirement) inflation.
to control the
Research Bulletin Volume 2 at
main growth engine, which in turn encouraged The Bank mainly uses the discount rate
level of money supply and consequently inflation.
rapid
export growth in sugar,
prices for supporting sectors
reinforced such
by the realas largely moves
which largely in harmony
moves in with the movements
harmony with the in cont
construction. The Bank mainly uses the discount rate which
depreciation of This also generated
the Lilangeni. However,additional
in recent movements
the repurchaseinrate theinrepurchase
South Africa. rate
This isinmainly
South inde
revenue which permitted the consequent Central Africa.Bank This is mainly
of capital
Swaziland done to curb capital
© 2018
years, that growth
expansion stimulus subsided.
of government services. Apart Pflight done to curb flight as there is free flow of
a g e as there is free flow of capital in the
from the inflows into the manufacturing CMA. capitalThein the CMA.below
graph The graph
showsbelow showsseries
the time the
Swazilandthe
sector, has growth
suffered sluggish growth was
performance since also
the data for the discount rate and inflation from
time series data for the discount rate and inflation
aided by more conventional external
turn of the century, averaging 3.2 per cent stimuli, 2006 to 2017.
such as improved export prices for sugar, from 2006 to 2017.
between the years 2001 to 2016. Economic
reinforced by the real depreciation of the Figure 2: 2: The
The Monetary
Monetary Policy
PolicyRates
RatesBetween
Between
growth has been
Lilangeni. slowingin
However, down since 2013,
recent years,falling Swaziland and
that Swaziland South Africa
and South Africa
growth stimulus subsided.
from 4.6 per cent to 1.3 per cent in 2016, 14
12
averaging 2.5 per cent over this period. The
Swaziland has suffered sluggish growth 10
slowdown
since the isturn
due of
to continued drought
the century, and a
averaging 8
per cent
3.2 per external

difficult cent between the especially
environment, years 2001 to
from 6
2016. Economic growth has been slowing 4
South Africa, leading to a sharp decrease in South
down since 2013, falling from 4.6 per cent 2
African
to 1.3 Customs
per centUnion (SACU)
in 2016, revenues. 2.5
averaging Suchper
a 0
cent
decreaseover this period.
in revenue, Thewith
combined slowdown
increasedis
due to continued drought and a difficult
public spending, has generated higher fiscal SD_Discount_Rate SA_Repo_Rate
external environment, especially from South
deficits and
Africa, a growing
leading to apublic
sharpdebt.
decrease in South Source: Central Bank of Swaziland
Source: Central Bank of Swaziland
African Customs Union (SACU) revenues.
Figure 1: GDP Growth Rates in Swaziland
Such a decrease in revenue, combined with South
South African prices are
African prices are the
the dominant factor
dominant factor
8.00% 6.86%
5.99% determining the inflation level in Swaziland
45
6.00% 4.44% 4.74% 4.25%
3.79%
4.00% 2.25%
(Ndzinisa, 2008).
Central Bank Of With free
Swaziland flow of goods
© 2018
1.57% 1.46%1.31%
2.00% 0.82% between South Africa and Swaziland, as well as
determining the inflation level in Swaziland and this had a once-off effect especially
(Ndzinisa, 2008). With free flow of goods during the period in which it was introduced.
between South Africa and Swaziland, Research as wellBulletin Volume 2
as through close proximity, the two countries Figure 3: Inflation Movements in the CMA
fuel, electricity
have extremelyand food.trade
strong With andfuel investment
having the 14
links. Further,
strongest importthe two countries
inflation effect.enjoy strong
Swaziland 12
investment links with South African
imports over 80 per cent of its electricity fromretailers
10
and financial institutions established in
South Africa. These
Electricityaretariffresponsible
increases have
per cent
Swaziland. for 8
transferring the price those

mirrored or surpassed and monetary policy
in South Africa. 6
effects to Swaziland.
Other food items such as cereals are all imported. 4
Such imports
Imported therefore
inflation transmit
effects arethe effects of
transmitted 2
through the infixed

price changes Southexchange
Africa to rate. The
Swaziland’ 0
Lilangeni is at par with
inflation developments over Rand. As such,
time. Generally
components contributing significantly to the
inflation rates
consumer in theindex
price CMA moves in tandem, with
are imported from South Africa Swaziland
South Africa,
Swaziland among especially fuel,
the highest andelectricity
Namibia withand Lesetho Namibia
food. With fuel

the lowest rates. having the strongest import Source: Member
Source: Member Countries
Countries Central
Central Statistics OfficesStatistics Offices
inflation effect. Swaziland imports over 80
per cent of its electricity from South Africa. 1.1.3 Exchange
1.1.3 Exchange Rate Developments
Rate Developments
Electricity
Following the tariff increases
2007/2008 have
global mirrored
financial crisisor
Maintaining
Maintaining a a healthy
healthy export
export sector sector over
over a long
surpassed
which led to those in South
the first Africa.
recession Otheryears
in recent food a long period requires maintaining an
items such as cereals are all imported. Such period requires maintaining an appropriately
and the decade of undeterred growth, the level of appropriately stable, competitive and
imports therefore transmit the effects of stable, competitive
sustainable and sustainable
exchange exchange rate.
rate. Swaziland has
inflation
price increased
changes drastically
in South Africa and recorded
to Swaziland’ achieved
Swaziland has a achieved
sustainable exchange
a sustainable rate
exchange
inflation developments
double digits. over inflation
In the year 2008, time. Generally
in South through the
inflation rates in the CMA moves in tandem, rate through thepeg withthethe
peg with SouthSouth
AfricanAfrican
Rand.
Africa and Swaziland recorded 11.5 and 12.5 per Rand. This has offered certainty to
with Swaziland among the highest and This has offered
economic certainty
agents, to economic
especially agents,It
exporters.
cent respectively.
Namibia with theBetween
lowest the period 2011 and
rates. is however
especially not possible
exporters. for Swaziland
It is however not possibleto
2017, the inflation trajectory for the CMA adjust (manipulate) the exchange ratetheto
Following the 2007/2008 global financial for Swaziland to adjust (manipulate)
countries remained subdued. Swaziland, promote export competitiveness. Generally,
crisis which led to the first recession in exchange
a depreciation ratebooststo export
promote
receipts export
and as
however,years
recent registered
and thethe decade
highest of
inflation rates
undeterred such makes Swazi
competitiveness. products
Generally, competitive
a depreciation boostsin
growth,
and deviatedthebylevel
a largeofmargin
inflation
from theincreased
rest of export markets outside of the CMA. Figure
drastically and recorded double digits. In export receipts and as such makes Swazi products
the CMA in 2012 mainly due to the introduction 3 illustrates the movement in nominal
the year 2008, inflation in South Africa and competitive in export markets outside of the
exchange rates from 2006 to 2017. During
of the value
Swaziland added tax
recorded 11.5(VAT) whichper
and 12.5 added
cent CMA.period
the Figureunder
3 illustrates
review the the exchange
movement rate in
respectively. Between the period
pressure on prices to increase on goods and 2011 and of Lilangeni to US dollar
2017, the inflation trajectory for the CMA nominal exchange rates fromwas 2006consistently
to 2017.
services that attracted the VAT and this had a depreciating, from an average of around
countries remained subdued. Swaziland, During the period under review the exchange rate
E7.00 in 2006 to an average of around
once-off effect
however, especiallythe
registered during the period
highest in
inflation of Lilangeni
E13.20 to USThis
in 2017. dollar
was wasdue consistently
to various
rates and
which it wasdeviated
introduced.by a large margin from factors
depreciating, from an average of aroundof
ranging from the effects global
E7.00 in
the rest of the CMA in 2012 mainly due to financial crisis on capital flows to emerging
the introduction
Figure 3: Inflationof the value in
Movements added
the CMAtax (VAT) 2006 to an average of around E13.20 in 2017.
countries to political factors in South Africa
which added pressure on prices to increase This globally.
and was due to various factors ranging from the
on goods and services that attracted the VAT
effects of global financial crisis on capital flows to
46
Page Central Bank Of Swaziland © 2018
The influence of exchange rate towards 1.2 The importance of the Paper
inflation itself depends on the level of Monetary integration, to varying degrees
imports denominated in foreign currencies. has become an increasingly important
As the Lilangeni/Rand freely floats, it has phenomenon within the modern global
over time been extremely volatile, on the political economy. The global political
weaker side. A depreciation (devaluation) economy is characterized by regions
of the domestic currency can affect the developed into building blocks to develop
price level directly through imported goods economies of scale to take advantage of trade
that domestic consumers pay. However, agreements as well as policy harmonisation
this condition occurs if the country is the for quasi-homogeneous economies. Such
recipient of international prices. This is homogeneity is mainly on the structure
more pronounced for fuel and some food of the economies and historical political
items, such cereals linked to wheat prices. links, such as is the case for the Southern
That is on the demand side. On the supply African Customs Union (formed in 1969).
side, the transmission of the effects of Due to such demand, the countries agreed
the exchange rate is through intermediate that in order to foster stronger trade ties,
goods, which are inputs to the production a currency union, CMA, was an imperative.
process. With trade liberalization, and The CMA offers the opportunity for countries
global interconnectedness, it has become such as Swaziland to enjoy macroeconomic
easy to source products globally. However, stability as well as price and financial sector
the depreciation of the currency would tend stability through exchange rate stability.
to increase production costs and such be The Lilangeni is pegged one to one to the
inflationary as manufacturers will transfer South African Rand. This allows the country
costs increases to consumers. to “import some” price stability as well as
any ailments into the domestic economy.
Figure
Research Bulletin Volume4:
2 Exchange Rates Movements in the This was evident in Rand crises in 1985, 1998
CMA and 2002.
in South 25
20 Recently, the efficacy of the country’s

15 monetary policy especially on curbing
Emalangeni
inflationary pressures has been put on the

inflation 10
spotlight as the country battled high inflation
imports 5 in 2016. Questions have also been raised
As the 0 on whether the CMA is still an optimum
currency area or not. It is therefore against
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
ime been this backdrop that this study is conducted.

side. A US Dollar Pound Sterling Euro The rest of the paper is organised as follows;
domestic
Source:
Central Bank of Swaziland section 2 is the review of literature, section 3
is the methodology, section 4 are the results
directly The
Thecurrency
currencydepreciation has a positive
depreciation spin-off
has a positive and discussions, while section 5 presents the
onsumers spin-off
on on the
the trade trade
balance andbalance
as suchandthe as such
overall conclusion and policy recommendation.
e country the overall external position of a country,
external position of a country, all other things
all other things remaining equal. The 2.0 LITERATURE REVIEW
s. This is remaining equal.ofThe
depreciation thedepreciation of the prices
local currency, local
od items, constant,prices
currency, increases revenues
constant, fromrevenues
increases exports 2.1 The impact of monetary policy changes
is on the and contribute positively to the external on macroeconomic variables
from exports and contribute positively to the
position of the country. Using monthly data spanning from 1990 to
ide, the external position of the country. 2015, Dlamini and Skosana (2017) applied
ge rate is
inputs to
alization,
1.2 The importance of the Paper
Monetary integration, to varying degrees has
47
the structural vector autoregressive (SVAR) the Nigerian economy using data spanning
model approach to investigate the impact of from 1981 to 2008. The results revealed
monetary policy changes on macroeconomic that monetary policy represented by money
variables in Swaziland. The results revealed supply had a positive impact on GDP growth
that a shock on the discount rate had a and Balance of Payments (BOP), but had a
negative impact on inflation, even though negative impact on inflation.
the response was not statistically significant.
The results further revealed that a positive Peersman and Smets (2003) applied a
shock on the discount rate had a negative standard VAR for the Euro area using data
effect on business credit and GDP. These spanning from 1980 to 1998 to investigate
variables respond to the shock with different the response of main macroeconomic
lags. variables to an unexpected monetary policy
shock. The results revealed that a positive
Results by Simatele (2003), revealed that shock to the interest rate was followed by a
in Zambia bank lending is not driven by fall in output and a real appreciation of the
monetary policy but rather by demand. exchange rate. The results also revealed that
The results further revealed that a prices appear to be sticker and therefore
contractionary monetary policy had a respond with a lag and a decline several
negative and significant effect on inflation quarters later. Popescu (2012) employed
and GDP. Kalikeka and Sheefeni (2013) a VAR approach to analyse the effects of
investigated monetary policy transmission monetary policy in Romania using quarterly
in Zambia focusing on the interest rate data spanning from 2005 quarter three to
channel using data from the year 1980 to 2012 quarter one. The results revealed a
2011. The granger causality results showed negative response of inflation, GDP and
a bidirectional causality relationsionship Money supply, and a positive response by the
between inflation and interest rate, and a nominal exchange rate.
unidirectional causality from GDP to interest
rates. The impulse response results were Cheng (2006) applied both recursive and
similar to those of Simatele (2003) in which non-recursive SVAR to monthly data in Kenya
a positive shock on monetary policy had a for 1997–2005. The results revealed that an
negative impact on GDP and inflation. On increase in interest rate led to an increase in
the overall, the results provided evidence of the price level followed by a falling price level
a functional interest rate channel existence that was statistically significant for about
in the Zambian economy. two years following the shock. In response
to a contractionary monetary policy, output
Ikhide and Uanguta (2010) used a vector rises initially but falls eventually, though the
autoregressive (VAR) approach to study the decline was not statistically significant.
impact of South Africa’s monetary policy
impact on Lesotho, Namibia and Swaziland Maturu, Maana and Kisinguh (2010) applied
(LNS) and found that monetary policy in the the use of a SVAR and a VAR to study
LNS responded instantaneously to changes in monetary policy transmission in Kenya using
monetary policy in South Africa. Ikhide and quarterly data from 2000 to 2010. Maturu,
Uanguta (2010) concluded that the South Maana, and Kisinguh (2010) used M3 as the
African repo rate was the most relevant monetary policy instrument and the results
policy instrument than the bank rates for the revealed that a positive shock on M3 had no
LNS countries. Onyeiwu (2012) employed effect on real output but had a statistically
the Ordinary Least Squares (OLS) method to significant positive effect on prices for
examine the impact of monetary policy on almost 18 months. A positive shock on the

interest rates had a negative effect on (d) Trade costs,

prices but this effect was not statistically (e) Authorities loss function and,
significant. Buigut (2009) applied structural (f) Nominal rigidities to a two-country two-
VAR methods to annual data for Tanzania in good Ricardian trade model.
1984–2005, and found evidence that interest
rate shocks had weak and insignificant Ijssennagger (undated) includes the
effects on output and inflation. generally regarded features determining an
OCA which are:
2.2 The Optimal Currency Area Theory (a) Degree of Trade; the percentage of intra-
Paolo (2002) asserts that one of the area trade as plotted by Ijssennagger
requisites for optimum currency area (OCA) (undated) gives an idea as to whether
boarders around the geographic domain as the OCA is appropriate.
there should be close proximity between (b) Similarity of Shocks and Cycles; the
countries for it to work optimally. The divergence and synchronisation of
individual currencies of the lesser countries shocks among countries considering to
are pegged to the currency of the hegemony, enter into a currency union where the
the dominant economy. For the case of the more synchronised the shocks the more
CMA, currencies of Lesotho, Namibia and appropriate are the countries to form an
Swaziland (LNS) are pegged one to one to OCA.
the South African Rand. The Rand floats (c) Degree of labour Mobility where the
freely against other world currencies. higher the level of labour mobility the
more suitable are countries to form an
The optimality of an economic zone is OCA.
among other properties defined in terms of (d) System of Risk-sharing; are the countries
the similarity (symmetry) of external shocks in a position to share and assist each
to which the different currencies found in other in smoothening out the shocks.
that geographic domain are exposed (Paolo,
2002). Coco and Silvestrini (2017) explain The theory of optimum currency areas
that not only is the measuring of the degree provides several criteria and econometric
of symmetry of shocks across countries an tools for analysing a prospective monetary
important indicator to assess the viability union. Building on these considerations,
of forming a currency union, but it is also some studies aim at assessing the suitability
important in assessing the sustainability of a of membership to the currency union and by
common currency area. The authors further evaluating the related macroeconomic costs.
point out that in a currency union, the size The structural vector autoregressive (SVAR)
and persistence of asymmetric shocks should model approach is one of the most commonly
be as low as possible, given that member used methods in examining correlation
countries forego their own monetary and and symmetry of macroeconomic shocks to
exchange rate policies. determine the feasibility or sustainability of
a common currency area. As a rule of thumb,
The Optimum Currency Area (OCA) models it is expected that in order for countries to
adopts tenets from Dornbusch, Fischer and meet the OCA criteria, the correlations of
Samuelson (1977) and from Blanchard and structural shocks should be positive which
Kiyotaki (1987) with an addition of: implies a prevailing symmetric component.
(a) Non-traded goods On the other hand, if the correlation is found
(b) Random Cobb-Douglas preference in to be negative and/or insignificant, the
goods and money, structural shocks are considered asymmetric
(c) Exchange rates, (Zhang et al., 2003).

49
Zhang, Sato and McAleer (2003) examined the 3.0 METHODOLOGY

viability of an OCA for the East Asian region
by testing the symmetry of the underlying 3.1 Introduction
structural shocks through a SVAR model. This study employs the use of two structural
The results indicated that some sub-regions vector autoregressive (SVAR) models, one
were potential candidates for the OCA as for determining the efficacy of monetary
their shocks were correlated. More recently, policy in Swaziland and another one for
Lee and Azali (2012) employed the same assessing the optimum currency area theory
model to assess the possibility of a common in the CMA. This chapter is divided into
monetary area among East Asian economies two main sections, namely; the efficacy of
by examining the symmetry of demand and monetary policy in Swaziland and the CMA as
supply shocks. The result indicated that an optimum currency area. Other subtopics
establishing a common currency area among include diagnostic checks, and data and data
the economies was feasible. Omotor and sources.
Niringiye (2011) employed a two variable
model (real GDP and GDP deflator) and 3.2 Efficacy of Monetary Policy in
assessed the feasibility of forming an OCA in Swaziland
the West African Monetary zone using a SVAR One of the major objectives of the study
model. The results suggested that there was is to determine the efficacy of monetary
a possibility of the West African Monetary policy in Swaziland, especially on inflation.
zone to establish an common monetary area. Therefore, this section of the study presents
the methodology employed in determining
Kazerooni and Razzaghi (2014) used a three- the link between monetary policy actions and
variable SVAR model (gross domestic product, selected macroeconomic variables including
real exchange rate and consumer price inflation. For this particular model, monthly
index) to examine the symmetry of structural data spanning from 1990 to 2016 is used.
shocks among D-8 member countries in order Below is the estimation procedure which was
to ascertain the feasibility of a common followed when investigating the effects of
monetary area. The results revealed that monetary policy shocks on macroeconomic
structural shocks were positively correlated variables in Swaziland.
and symmetric between these countries
hence establishing a common currency area 3.2.1 Unit Root tests
would be possible. Coco and Silvestrini The study starts by testing for unit roots for
(2017) on the other hand, investigated the each of the variables under consideration.
nature and propagation of macroeconomic According to Gujarati and Porter (2009), it is
socks hitting the Euro area, in order to draw important to test for stationarity when using
conclusions on the functioning, sustainability time series because failure to do so can
and viability of the European monetary area result in spurious regression. A stationary
since inception. The results showed that the series can be defined as one with a constant
European Monetary Union, by favouring trade mean, constant variance and constant auto
and integration of financial markets, had covariance for each given lag. In stationary
induced more similarity and synchronization time series, shocks are temporary and
of shocks in the euro area. overtime their effects will be eliminated as
the series revert to their long run mean values
(Gujarati and Porter, 2009). Acknowledging
the existence of many tests for stationarity,
this study will limit itself to the Augmented
Dicky Fuller (ADF) test.

y recursive
rd Sims (1980),
structuralwhereby
VAR. the define
that Cholesky
matrix A0 as a lower triangular matrix.
ecomposition
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Cthis L to
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3.2.2 The Structural Vector Autoregression residuals (et) and structural shocks (Et) can
VARs, especially recursive VARS. On this basis, this reduced form VAR, the stu
ARs in advanced Model (SVAR) for Efficacy
economies, including
parameterof Monetary Sims A. Thus,
matrix be expressedthe order as follows:
of the variables
study uses the standard recursive structural
Policy VAR. Bulletin
Research thatVolume define2 matrix A0 as a l
1992), and Fry-McKibbinis as follows; andoutput
Zheng is (GDP),
similar
(2012) and inflation
to many studies used in the context of
Naceur,
The
that
ate (CPI), basic
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the studyof imposes
contains
PSCR)
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policy
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recursive variables.
largely
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nature have used
is
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follows;
basis,
Based on the
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by Cholesky
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reduced
define
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matrix form
A0
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the
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of Vector
VARs, especially recursive VARS. On this basis, this reduced form VAR, the study imposes constraints
he SVAR model can beAofexpressed asratefollows:
(CPI), money triangular
structuralsupply (M2), matrix.
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decomposition
matrix A0 lower triangular
is applied
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ofbasic Mishra,VAR
structural Montiel, model structural
inand follows
this study VAR. the original
The identification thatpaper
scheme define
follows byoriginal
the matrix
Sims (1980),
paper
Spilimbergo (2010) containsrevealed (PSCR) that and most the policy
of rate
whereby by (DR). the The matrix
Cholesky formthe of
wherebydecomposition is
follows:
mated. is a vector of serially
five endogenous variables. The matrix form Sims
parameter
(1980),
matrix Cholesky
A. Thus, th
The basic structural
𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 the 1studies 0
of the VAR
of this
0 nature 0 themodel
equation ofhave the VAR
0SVAR 𝜀𝜀 used inis selected
𝑡𝑡 VARs,
model
𝐺𝐺𝐺𝐺𝐺𝐺 thisas study
applied to the Thetoidentification
contemporaneous
decomposition is applied the contemporaneousparameter schem
especially recursive
follows:VARS. On this basis, this
model can be
matrixexpressed. Thus, as
the follows:
order of the variables is
tually
𝑒𝑒 orthogonal
𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 𝑎𝑎 structural
1 0 0 0 𝜀𝜀 𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 parameter
A
is similar to many
matrix A. Thus, the order of the variables
studies
contains𝑀𝑀𝑀𝑀𝑡𝑡 =
five
study
𝑎𝑎
21endogenous
uses the standard
𝑎𝑎 1
variables.
0
recursive 𝑀𝑀𝑀𝑀
0
The
structural matrix form
similar is similar to manyby
to many studies
studies used Sims
used in the
in the context (1980),
context
of w
𝑒𝑒
he number of VAR.lags.
31 32
The basic structural VAR model in this 𝜀𝜀 𝑡𝑡 of VARs in advanced economies, including
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡
𝑒𝑒the 𝑎𝑎42 𝑎𝑎five
𝑎𝑎41 contains 1 0model 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅
𝜀𝜀𝐺𝐺𝐺𝐺𝐺𝐺 Sims (1992), andand
VARs
is0as is as in𝐺𝐺𝐺𝐺𝐺𝐺(GDP),
VARs in advanced economies, including Sims
follows; advanced
𝑡𝑡 output (GDP),econo
of
represented equation
study
[𝑎𝑎by
of
𝑎𝑎52form
the the
above
43 VAR
𝑎𝑎Where;
endogenous
𝑎𝑎Y 54isequation
𝑒𝑒
] 𝑒𝑒[ 𝐶𝐶𝐶𝐶𝐶𝐶
𝑡𝑡 𝑡𝑡
variables.is
the vector containing the five selected
1 0 as
0
(1992), decomposition
0
follows; 𝜀𝜀
output inflation is applie
[ 𝑒𝑒 𝐷𝐷𝐷𝐷𝑡𝑡 ] The 1 𝜀𝜀 𝐷𝐷𝐷𝐷 ] VAR inflation rate (CPI), money𝐶𝐶𝐶𝐶𝐶𝐶 supply (M2),
endogenous variables. A is a square𝑎𝑎matrix 0 0 0 𝜀𝜀 and is as follows;
51
matrix 53
of the of 𝑡𝑡 𝑡𝑡the
21 of1 (1992),
rate (CPI), money supply (M2), 𝑡𝑡
private sector credit
private
𝑎𝑎 sector credit rate(PSCR) and theform ofpolicy. Thus
Where;
follows:
fied Y is
for the purpose of policy the
model is vector
selected ascontaining
follows:
coefficients to be estimated.
𝑀𝑀𝑀𝑀 = 𝑎𝑎
𝑒𝑒 is a vector of31serially
𝑡𝑡 the rate
five
32 (PSCR)1
(DR).
and the
The
0 parameter
policy 0
matrix
(DR). 𝑀𝑀𝑀𝑀
𝜀𝜀form
The𝑡𝑡 matrixmatrix A
𝑎𝑎 𝑎𝑎 the𝑎𝑎 1 can be0expressed as 𝑡𝑡follows: the SVAR
of
uncorrelated, and mutually
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑒𝑒 orthogonal structural
𝑡𝑡 41 model 42 SVAR model
can rate (CPI),
43 be expressed
𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅
money supply (M
𝜀𝜀 as follows:
endogenous
Where variables.
iven economic interpretation
the left hand theAequation
side ofdisturbancesis
and pa 𝑒𝑒square
is[the contains amatrix
[𝑎𝑎
𝐷𝐷𝐷𝐷𝑡𝑡 ] of lags.
number 51 52 of
𝑎𝑎53 𝑎𝑎 𝑎𝑎54 is1similar
] [ 𝜀𝜀 𝐷𝐷𝐷𝐷𝑡𝑡 ] to many stud
Aector
reduced formto
of residuals of bethethe
in
The structural model represented by the above
model,
reduced form, and on the (PSCR) and the policy rate (
𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡
𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡
1 0 0 0 0 𝜀𝜀 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡
0 𝜀𝜀 𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡
coefficients estimated. is a vector
system must be identified for the purpose of policyof serially 𝑎𝑎21
𝑒𝑒 𝑀𝑀𝑀𝑀𝑡𝑡 = 𝑎𝑎31
1
VARs in advanced ec
𝑎𝑎32
0
1
0
0 0 𝜀𝜀 𝑀𝑀𝑀𝑀𝑡𝑡
𝑎𝑎41 𝑎𝑎42 𝑎𝑎43 1 0 𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅𝑡𝑡
multiplying
ight hand both side sides
is thebysquared
A-1
analysis and matrix the
Where
must be given (A0)
economic
leftof hand side of the equation
interpretation the SVAR
𝑒𝑒 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡
[ 𝑒𝑒 𝐷𝐷𝐷𝐷𝑡𝑡 ] [𝑎𝑎51 contains
𝑎𝑎52 model
𝑎𝑎53 𝑎𝑎54 a can be expr
1] [ 𝜀𝜀 𝐷𝐷𝐷𝐷𝑡𝑡 ]
uncorrelated, Where;and mutually
Y is the vector
(Leeper orthogonal
containing
et al, 1996). A reducedthe structural
five
form of the model, (1992), and is as follow
Where; associated
oefficients Y is the
endogenous with vector
lagged
variables.
which A vector
is obtained acontaining
is variables
by square
multiplying and
of residuals sides bythe
matrix
both in
Where
A-1 five
theWhere
reduced
thetheleft form,
hand
left hand and
side ofside on
of the
the equation the equation
contains a
disturbances and p isisthe number
specified as follows; of lags. contains residualsrate
vectoraofvector of (CPI),
residuals
in the reduced money
in and
form, theonreduced
the supply
tructural
endogenous shocks through
of coefficients
variables. the
to column is vector
beA estimated.
right a handsquare(ɛ).side
is amatrix
is form,
the right
squared
ofhandonsidethe matrix 𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺(A0) of(A0)1ofis the0
𝑡𝑡 matrixside
and is the right
squared hand
The structuralvector of model represented
serially uncorrelated, by the squared
and mutually above (PSCR) 𝐶𝐶𝐶𝐶𝐶𝐶 𝑡𝑡 and the andpolicy ra
he econometric identification of
orthogonal structural disturbances and monetary
coefficients policy
associated
p is with matrix
lagged
coefficients (A0)
associated ofwith
𝑒𝑒coefficients
variables lagged
and
variables𝑎𝑎21
associated 1
coefficients to be estimated. is a vector of serially
31 𝑎𝑎32
with lagged variables and column vector (ɛ). shocks
structural
system
hocks is must
crucialbe to
the number identified
of lags. for the purpose of policy
any
where е is
model
a vector of serially uncorrelated,
specification,
structural shocks
but not
through
structural shocks through the
thethecolumn vector
𝑀𝑀𝑀𝑀
𝑒𝑒 𝑡𝑡of(ɛ). = 𝑎𝑎policy
serially uncorrelated, but not necessarily orthogonal, reduced form through
disturbances. The column
econometric the SVAR
vector
identification
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 model
monetary
𝑎𝑎 can𝑎𝑎42be e𝑎𝑎
uncorrelated, and mutually orthogonal structural shocks is crucial to 𝑒𝑒any model 41
specification,
,analysis and
ncluding The must
SVARs. structural
The SVAR be Ingiven
model economic
represented
identification interpretation
by the
exercise
51 𝑎𝑎52 𝑎𝑎
that regard, the relationship between the reduced
The econometric identification of monetary[SVAR 𝑡𝑡 policy
] of[exercise
𝑎𝑎monetary
reduced form disturbances.
above system form must VARbe identified for the
The econometric
including SVARs. The 𝑒𝑒 𝐷𝐷𝐷𝐷
identification
identification
disturbances
ollowed in this and
paper pexplained
iscanthe
ispolicy number
residuals
as follows;
shocks of
isbelags.
( ) and structural shocks
crucial policyfollowed
to anyshocks is iscrucial
in this paper
model explained asto
specification, any model
follows;
(Leeper
ionship etpurpose
betweenal, 1996).
the ofreduced Aanalysis
reduced
be expressed and
as form
must
follows: of the model,
given
specification, including
 The ordering of output and𝐺𝐺𝐺𝐺𝐺𝐺 SVARs.
price𝑡𝑡 levelThe
at the SVAR
economic interpretation (Leeper et al, 𝑒𝑒 1 0
The
The structural
which
ordering
1996).
is obtained
of A model
output
reduced and
formrepresented
by multiplying both
price
ofincluding
the level
model, at by
the
SVARs.
which the
sides by
The above
identification
SVAR exercise
identification
beginning is because they
A-1in the monetary
followed
exercise
react
𝐶𝐶𝐶𝐶𝐶𝐶
in this paper
to an innovation
) and structural shocks . is explained asWhere
follows; 𝑒𝑒with a left
policy ratethe
𝑡𝑡
lag due tohand 𝑎𝑎21side1of
their
is obtained by multiplying both sides by A-1
beginning is because they react followed
system must to an innovation in this paper zzis The
explained asofinfollows; 𝑒𝑒 𝑀𝑀𝑀𝑀 = level 𝑎𝑎31at 𝑎𝑎32
as be identified
as follows; for the purpose of policy
ordering
slow movement output
nature. and 𝑡𝑡 price
is specified
lows: is specified
follows;
in the monetary policy rate with a lagThe dueordering
to their of output
the beginning
and price
vector 𝑒𝑒of𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
is because residuals
they react to
at 𝑡𝑡the 𝑎𝑎 inanthe re
𝑎𝑎42
innovation in thelevel monetary policy 41 rate
analysis and must be given economic interpretation 𝑎𝑎
side [𝑎𝑎is51the 52sq
to [hand 𝑡𝑡 ] movement
58 | P a g e
slow movement in nature. beginning is becausewith theyareact lagright

dueto an 𝑒𝑒 𝐷𝐷𝐷𝐷slow
their
innovation
in nature.
(Leeper . et al, 1996). A reduced form of the model,
in the monetary policy z z rate with
Economic coefficients
a lag due todetermine
activities associated
their the with
demand for money in an economy thus
which is obtained by multiplying slow 58both
| P a g esidesinby
movement A-1 structural
nature.
affecting Where
money supply the
shocks leftprivate
and hand side
through th
where е is a vector of serially uncorrelated, but not
where е is a vector of serially uncorrelated,
sector credit. The study therefore orders
is specified but asnot follows;
necessarily orthogonal, reduced
money supply The vectoreconometric
third whiles of private
residuals sector in the
identificat
necessarily
d © 2018
formorthogonal,
disturbances. reducedIn that form regard, disturbances.
the
credit is ordered fourth.
58 | P a g e
relationship between the reduced form VAR
In that regard, the relationship between the reduced shocks hand
right is crucial side to is the
any
form VAR residuals ( ) and structural shocks

coefficients
including associated
SVARs.
Central Bank Of Swaziland © 2018The SVARw 51
zz Amongst other things, the Central identification scheme and identified a series
Bank of Swaziland before deciding on of demand and supply shocks for economies
its monetary policy stance considers in different regions to examine whether
developments in the domestic economy forming an optimum currency area was
and this include output, inflation, viable.
money supply and private sector credit.
In this regard, the study orders the These authors tested for symmetry
discount rate last since its level is, in (correlation) of the underlying structural
part, influence by the above mentioned shocks between countries in Western
factors. Europe, East Asia and the Americas. Coco
and Silvestrini (2017) also used a SVAR model
The impulse response and variance approach to determine the viability of the
decomposition analysis are carried out to European Monetary Union, after its long
determine the effects of the discount rate existence. As in Coco and Silvestrini (2017),
shocks in the estimated model. The impulse this study adopts a SVAR representation to
response function in a VAR analyses dynamic investigate whether the CMA is an optimum
affects on the system when the model currency area or not. The study uses three
received the impulse of say one standard variables (consumer price index, real GDP
deviation shock. The variance decomposition and real exchange rate) to construct the
reveals some amount of vital information VAR model required to examine the shocks
and explanation of the contribution of each according to the OCA criteria and to establish
variable to other variables in the system. whether countries in the CMA do exhibit
some level of convergence or not.
3.3 Is the CMA an Optimum Currency Area?
The second objective of the study is to Following Fielding and Shields (1999), the
determine whether the CMA is an optimum estimated innovations in the SVAR model are
currency area or not and the study uses the referred to as the macroeconomic shocks
OCA criteria to asses such. wherein conclusions about the degree of
similarity of shocks between countries, are
3.3.1 OCA Criteria based on the pairwise correlation of the
The paper builds on the two-country model innovations in their respective models. This
developed by Ricci (1997). Ricci (1997) paper thus focuses on shocks to real gross
asserts that converging to the anchor domestic product (q), consumer price index
economy accrued certain costs to the smaller (p) and the foreign price (xr) shock common
economy. Any volatility of the exchange to all member countries.
rate (of the anchor economy) would be
transferred fully to the smaller countries. 3.3.2 The Structural Vector Autoregression
(SVAR) for OCA
Generally, the OCA analysis focuses on how In this paper’s SVAR OCA criteria, we let
various macroeconomic variables such as GDP
growth, inflation, exchange rates, interest
rates and stock prices are correlated across where Δ represents the first difference
economies or regions. Among the first to operator, y is the vector of the endogenous
identify the fundamental structural shocks variables and denote the
were Bayoumi and Eichengreen (1992), and orthogonal shocks of supply, demand and
Bayoumi and Eichengreen (1994) who used exchange rate, respectively. The structural
a structural vector autoregression (SVAR) VAR model is thus presented as follows;

denotes the lower triangular Choleski

decomposition of , then A(1) =H as
the long run restriction imply that A(1) is
where εt is a 3x1 vector of observable also lower triangular. As a result,
endogenous variables as indicated above.
is a polynomial
function of the lag operator, L
3.6 Diagnostic checks
Once the models have been estimated, there
were subjected to various diagnostic tests,
which assess their stochastic properties,
such as residual autocorrelation, normality
The methodology employed by this paper and model stability.
assumes that the structural shocks are
uncorrelated and have a covariance matrix 3.7 Data
normalized to the identity matrix. The Data used in the study was obtained from the
conditional requirement for the restrictions Central Bank of Swaziland, Central Statistical
sufficient to identify the structural Ai matrix Office, and the World Bank. Since GDP data
and time series of structural shocks is that is of low frequency, it was interpolated into
monthly series using e-views software.
A reduced-form VAR is constructed as follows:
4.0 RESULTS AND DISCUSSIONS
where ut is a vector reduced-form disturbance
and B(L) is a 3 x 3 matrix of lag polynomial. A 4.1 Efficacy of monetary policy in Swaziland
moving average representation of equation
(2) is specified as: 4.1.1 Stationary
The ADF stationarity test results shows
that all the variables were not stationary
at their levels but had to be differenced
where and the lead once to attain stationarity, meaning all the
matrix of is by specification, C0=I. By variables are I(1). The Akaike’s information
comparison of the above equations the criterion (AIC) and the final prediction error
relationship between the structural and (FPE) selection criteria selected an optimal
reduced form disturbances: is lag length of 4 whiles the Schwarz Criterion
obtained. In order to recover the structural (SC) and the Hannan-Quinn criterion (HQ)
shocks of εt it is imperative that estimates of selected a lag length of 3. Thus the study
A0 be obtained. As the structural shocks are selects 4 as an optimum lag length.
mutually orthogonal and each shock has unit
variance, the following relationship between 4.1.2 Inverse roots of characteristic
the covariance matrices is obtained: polynomials for Model 1
The inverse roots of characteristic
polynomials for Model 1 indicates that the
model is stable as all the unit roots lie within
where .H the circle.

53
Figure 7: Inverse roots of characteristicResearch Bulletin Volume 2

4.1.4 Variance Decomposition Analysis
polynomials for Model
Inverse Roots 1
of AR Characteristic Polynomial Table 1 shows the variance decomposition Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of LGDP to DR Response of INFL to DR
1.5 analysis for real GDP, inflation, money supply,

.004
.000
.24
.20
and the private sector credit in response to

.16
-.004 .12
shocks in the monetary policy rate (discount

.08
1.0 -.008 .04
.00
rate). The results reveal that shocks on the

-.012
-.04
-.016 -.08
0.5 discount rate account for a 4.4 per cent and

5 10 15 20 25 30 35 5 10 15 20 25 30 35
6.96 per cent variation in inflation in 6 months

Response of LM2 to DR Response of LPSCR to DR
.010 .01
0.0
and 36 months, respectively. This indicates
.005
.00
.000
-.01
that inflation dynamics in the country are

-.005
-.02
-0.5 -.010
largely explained by other variables and

-.015
-.03
not the discount rate as it accounts for a

-.020 -.04
5 10 15 20 25 30 35 5 10 15 20 25 30 35
-1.0
smaller portion of the variation in inflation.
.16
Response of DR to DR
-1.5
A variation in money supply is explained by
.12
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 1.6 per cent of variation in the discount rate
.08
.04
Source: Own Calculations in 6 months and 1.47 per cent in 36 months
.00
Source: Own Calculations
whiles private sector credit variation is
-.04
5 10 15 20 25 30 35
4.1.3 Impulse Response Functions explained 0.2 per cent and 2.58 per cent
4.1.3 Impulse Response Functions
The impulse response results presented on Source: own calculations
variation in the discount rate in 6 and 36
The impulse
Figure response
8 indicate results
that presented
a shock on theon Figure
discount months, respectively. Lastly, the results
rate only that
8 indicate hasa ashock
negative
on the significant
discount rateeffect
only indicate that discount rate shocks account
on the real gross domestic product (GDP), Table
for about 1 shows0.15 per the cent
variance decomposition
and 15.18 per cent
has a negative significant effect on the real gross
inflation and money supply (M2). Inflation variation
analysis for in
realreal
GDP,GDP in 6money
inflation, and 36 months,
supply, and
domestic product
responded with a(GDP),
lag andinflation
starts and money
decreasing respectively.
the private sector credit in response to shocks in
after
supply 6(M2).
months whiles
Inflation real GDP
responded with aresponds
lag and
significantly after 18 months. The results the monetary
Table policy rate
1: The Variance (discount rate).
Decomposition The
Results
starts decreasing after 6 months whiles real GDP
also revealed that private sector credit Period reveal
results DR tothatDR to DR
shocks on tothe DR to DR
discount to
rate
responds
(PSCR) significantly
responds after 18
negatively to amonths.
shock onThethe GDP CPI LM2 LPSCR DR
account for a 4.4 per cent and 6.96 per cent
discount andrevealed
results also slightlythat
trends down
private overcredit
sector time. 1 0.00 0.00 0.00 0.00 93.03
variation
6 in0.15
inflation4.44
in 6 months
1.611 and0.20
36 months,
78.36
arch Bulletin Volumeresponds
(PSCR) 2 negatively to a shock on the
Figure 8: Impulse response functions for the respectively.
12 1.53This indicates
6.048 1.57 that
0.58 inflation
58.05
mial discount
SVAR and slightly trends down over time.
model
18
Response of LGDP to DR Response of INFL to DR
.004 .24
.20
dynamics in4.72 5.72 are1.43
the country 0.85 46.89
largely explained by
.000
.16
24 8.85 5.89 1.51 1.17 42.76
-.004 .12
other variables and not the discount rate as it
-.008
.08
.04
30 12.62 6.52 1.44 1.73 41.52
-.012
.00
-.04
accounts
36 for a smaller
15.18 6.97portion of the2.58
1.47 variation in
40.54
Source: own calculations
-.016 -.08
5 10 15 20 25 30 35 5 10 15 20 25 30 35
inflation. A variation in money supply is explained
Figure 8: Impulse response functions for the
Response of LM2 to DR Response of LPSCR to DR
SVAR model
.010 .01
by
4.21.6Optimal
per cent Currency
of variationArea
in the(OCA)
discount rate in
Model
.005
.00
.000
-.01 6 months and 1.47 per cent in 36 months whiles
4.2.1 Pairwise Correlation
-.005
-.02
private sector credit variation is explained 0.2 per

-.010
The pairwise correlation coefficients

-.03
-.015
-.020 -.04
5 10 15 20 25 30 35 5 10 15 20 25 30 35
cent and 2.58
measuring thepercorrelation
cent variation in the discount
of demand shocks
Response of DR to DR
.16
rate in 6 and 36 months, respectively. Lastly, thein
across the CMA countries are presented
.12
Table 2.
results The that
indicate results revealed
discount that account
rate shocks demand
1.5
.08
.04 shocks are less correlated among the

.00 for
CMAabout 0.15 percountries;
member cent and 15.18 per cent
instead, they
have converged around the South African
-.04
5 10 15 20 25 30 35
Central Bank
Source: of Swaziland © 2018
Own Calculations 61 |
P a g eown calculations
Source: economy.
ure
nly
oss
Table 1 shows the variance decomposition
analysis for real GDP, inflation, money supply, and
The results reflect the effect of South Africa Table 3: Correlation of Structural Supply
as an anchor economy on CMA monetary policy Shocks across CMA countries, 2002Q1-2016Q4
implementation and how developments in Country SA SD NAM LES
this economy filter through to the other SA 1.00
member states. Even though the structural
SD 0.05 1.00
shocks are insignificant between Swaziland
and Namibia, and Lesotho and Namibia, the NAM -0.85 -0.46 1.00
correlation coefficients of the shocks are LES -1.56 0.12 0.17 1.00
Note: SA: South Africa, SD: Swaziland, NAM: Namibia, LES:
positive, indicating that they are symmetric.
Lesotho.
Table 2: Correlation of Structural Demand

Shocks across CMA countries, 2002Q1- Table 4 presents the results of the pairwise
2016Q4 correlation of exchange rate shocks across
Country SA SD NAM LES the CMA countries. As shown in the table,
the correlation of real exchange rate shocks
SA 1.00
exhibit some level of symmetry, which
SD 0.76* 1.00 prevails between Swaziland, South Africa
NAM 3.70** 0.26 1.00 and Namibia. The significant correlations are
LES 1.03* 0.63* 0.004 1.00 synonymous with the pegged exchange rate
Note: SA: South Africa, SD: Swaziland, NAM: Namibia, LES: policy as well as the close coordination of
Lesotho. Painted figures denote significance of correlation.
*,** denote statistical significance at 1 and 5 per cent level.
monetary policy implementation in the CMA.
Table 4: Correlation of Structural Real

Table 3 shows a contrasting pattern of the
Exchange Rate Shocks across CMA countries,
pairwise correlation of supply shocks as 2002Q1-2016Q4
compared with the demand shocks. The
Country SA SD NAM LES
results indicate that supply shocks in the
CMA over the period 2002Q1-2016Q4 have SA 1.00
mixed effects and all were insignificant. SD 0.39* 1.00
Asymmetric shocks were observed between NAM -0.39 1.25* 1.00
South Africa and Namibia, South Africa LES 0.09*** 0.25* 0.03 1.00
and Lesotho, and Swaziland and Namibia. Note: SA: South Africa, SD: Swaziland, NAM: Namibia, LES:
Symmetry shocks observed between South Lesotho. Painted figures denote significance of correlation.
*,*** denote statistical significance at 1 and 10 per cent
Africa and Swaziland, Swaziland and Lesotho,
level.
and Namibia and Lesotho. Even though the
correlation coefficients between Swaziland
While the results favour the existence of
and Namibia, and Lesotho and Namibia
the CMA as an optimal currency area based
are insignificant, worth noting is that the
on the significance of the demand and real
coefficients carry a positive sign, indicating
exchange rate shocks correlation, the OCA
that the structural shocks are symmetric.
theory asserts that supply shocks are a more
informative indicator for evaluating the
symmetry of shocks. This is because unlike
supply shocks, demand and monetary shocks
using the structural VAR approach tend
to include the effects of macroeconomic

55
policies as well as purely stochastic Table 5: Variance Decomposition of Changes

disturbances (Bayoumi & Eichengreen, 1994). in Real GDP, Consumer Price Index and Real
It thus becomes a consequent outcome that Exchange Rate
the more (less) the symmetry of shocks, the Real GDP/ Consumer Real Exchange
Output Price Index Rate
more (lesser) the possibility and justification
for economies to establish an OCA.
Exchange Shock
Exchange Shock
Exchange Shock
Demand Shock
Demand Shock
Demand Shock
Supply Shock
Supply Shock
Supply Shock
The variance decomposition analysis
measures the proportions of forecast error
variance in a variable that is explained by
SA 76.2 14.0 9.8 17.5 74.5 7.96 14.2 18.6 67.2
impulses in it and by the other variables
SD 77.3 3.43 19.0 22.1 66.4 11.5 46.9 9.06 43.9
in the system. In a statistical sense, if a
NAM 73.1 18.6 8.3 8.7 80.7 10.6 21.1 18.1 60.8
variable explains most of its own shock, then
LES 69.1 26.3 4.6 6.1 81.5 12.4 15.7 40.5 43.8
it does not allow variances of other variables Source: own calculations
to contribute to it being explained and is
therefore said to be relatively exogenous.
5.0 CONCLUSION AND
Kazerooni and Razzaghi (2014) asserts
that if the variability of the forecast error RECOMMENDATIONS
variance is different between countries
then those countries would have to follow 5.1 Conclusion
different policy strategies and the chance of The study had two main objectives, namely;
establishing a common currency area should to determine the efficacy of the monetary
be put on hold. policy in Swaziland and secondly, to
determine if the CMA is an optimal currency
The results for the variance decomposition area. The study employed the use of two
analysis of real GDP, the consumer price SVAR models, one to determine the impact of
index and real exchange rate at the 12th monetary policy on selected macroeconomic
quarter are presented on Table 4. The supply variables, including inflation and the other
and demand shocks were found to be the to determine optimality of the CMA.
most predominant accounting for a larger
variability in their own variables in all the The impulse response results on the efficacy
CMA economies. At most, the own shocks to of monetary policy in Swaziland indicate that
the consumer price index (demand shocks) a shock on the discount rate has negative
and real GDP (supply shocks) account for effect on real GDP, inflation and private
almost 70 per cent of total variation in the sector credit. The variance decomposition
last quarter of the sample period in all four results indicate that the variability in GDP,
countries of the CMA. The similarities in these CPI, money supply and private sector credit
shocks accounting for larger variations in was explained by marginal variation of
these economies indicate that the countries the discount rate in the sixth month. The
can pursue similar policy strategies and results revealed that the effect of a shock
therefore are in support of the formation of on the discount rate on the other variables
the OCA. An own shock to the real effective increases with time. In 36 months, a shock on
exchange rate accounts for a combined 50 the discount rate accounts for 6.97 per cent,
per cent of total variation on average over 1.47 per cent and 2.58 per cent in variation
the 12th quarter period. in inflation, money supply and private sector
credit, respectively.

For the SVAR model the study considered observed between South Africa and Namibia,
three variables, namely; GDP as a supply South Africa and Lesotho, and Swaziland and
shock, real effective exchange rate as Namibia whilst South Africa and Swaziland,
monetary policy shock and the CPI as a Swaziland and Lesotho, and Namibia and
demand shock. In this model, the study Lesotho exhibited symmetric shocks. The
used quarterly secondary data spanning results for the pairwise correlation of real
from 2002 to 2016. All variables were non- effective exchange rate shocks across
stationary at levels and were transformed the CMA countries exhibit some level of
and differenced once to achieve stationarity. symmetry between Swaziland, South Africa
The pairwise correlation coefficients results and Namibia. The significant correlations are
for the demand shocks across the CMA synonymous with the pegged exchange rate
countries revealed that demand shocks are policy as well as the close coordination of
less correlated among the CMA member the monetary policy in the CMA. Generally,
states; instead, they have converged around the overall OCA criteria results are in favour
the South African economy. These results of the existence of the CMA as an optimal
reflect the effect of South Africa as an anchor currency area.
economy in the CMA and how developments
in this economy affect the other member 5.2 Recommendations
states. Even though the structural shocks The findings of the study supports the
are insignificant between Swaziland and Central Bank of Swaziland’s drive to align
Namibia, and Lesotho and Namibia, the policy rates with that of South Africa,
correlation coefficients of the shocks are but dependent on data outcomes. Since
positive, indicating that they are symmetric. the shocks of the LNS country are mainly
symmetric with that of the anchor economy
Mixed effects were observed for the supply (South Africa), the country’s membership
shocks correlation coefficients but all were to the CMA is therefore justified. Swaziland
insignificant. Asymmetric shocks were should therefore remain within the CMA.

57
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59
The Impact of Monetary Policy and 0.1 per cent on domestic public debt
Changes on Macroeconomic over twenty-four months. The insignificant
effect of the reserve requirement and
Variables in Swaziland: A special
the liquidity requirement on the fiscal
focus on Fiscal Variables variables, specifically domestic public debt,
suggest minimum monetary and fiscal policy
Sive Kunene10 and coordination between authorities. The
Thandeka Mdladla11 study therefore recommends that the two
monetary policy instruments be reviewed
Abstract more regularly to enhance coordination
between monetary and fiscal policies.
The study investigates the impact of
monetary policy changes on budget deficit, Key words: Monetary policy, fiscal variables,
tax revenue and domestic public debt in Structural VAR
Swaziland. Time series data obtained from
the Central Bank of Swaziland and the 1.0 INTRODUCTION
Ministry of Finance was used to run three The 2008/2009 financial crisis inspired
Structural Vector Autoregressive (SVAR) debates on the role of central banks and their
models where the discount rate, liquidity ability to efficiently manage the economy.
requirement and reserve requirement were Generally, there is consensus in literature on
used as policy rates. In all three models, price stability being the primary objective
impulse response functions as well as variance of monetary policy (Hilbers, 2005); however,
decompositions were obtained. The impulse arguments are being raised on whether
response results revealed that all the policy Central Banks should focus on price stability
rates did not have a significant effect on the as their only objective (Bhattacharyya,
fiscal variables over a 24-months period. 2012). Reis (2016) asserts that one of the
The variance decomposition results indicate common discussions surrounding central
that a shock on the discount rate can banks is their ability to ease the fiscal burden
cause a 2.9, 1.4 and 1.5 per cent variation for a country. After investigating ways
on government deficit, tax revenues and through which central banks can alleviate
domestic public debt over a period of 24 fiscal burdens, Reis (2016) concluded that
months, respectively. A shock on the reserve there is limited scope for the central bank
requirement would cause a 0.4, 0.5 and 0.1 to lower or ease the fiscal burden.
per cent variation on government budget
deficit, tax revenues and domestic public Kaplan (2016) argues that even though
debt in twenty-four months, respectively. monetary policy is highly important, by itself
A shock on the liquidity requirement would it is not meant to address key structural
cause variation of 0.5 per cent on government issues. Kaplan further warns that monetary
budget deficit, 0.4 per cent on tax revenues policy should not be treated as a substitute
for actions, which should address structural
issues and other economic challenges.
10
Sive Kunene is an Economist, Policy Research, in
the Policy Research and Macroeconomic Analysis at Hilbers (2005) and Reis (2016) posit that
the Central Bank of Swaziland.,reachable at Sivek@ while different bodies implement monetary
Centralbank.org.sz. and fiscal policies, the two policies are not
11
Thandeka Mdladla is an Economist, Policy Research, independent of each other. A change in one
in the Policy Research and Macroeconomic Analysis policy affects the effectiveness of the other
at the Central Bank of Swaziland.,reachable at
and hence the overall impact of any policy
ThandekaM@Centralbank.org.sz.
change.

The Southern African Customs Union (SACU) these figures are below the 60 per cent
receipts, which have become the most debt-to-GDP ratio threshold stipulated in
important source of revenue for the Swazi the Protocol on Finance and Development
economy, averaging 48.6 per cent of Swazi for SADC members, the country’s ability to
Government’s total expenditure between service its debts has come under serious
the years 1999/2000 and 2016/2017, have scrutiny, as the most important element of
become increasing volatile (MoF, 2017). The debt management is the ability to service
percentage of the SACU receipts contribution the incurred debts to the satisfaction of the
to government expenditure has decreased creditors.
from 66.9 per cent in 2012/13 down to 24.8
per cent in 2016/17 as shown on Figure 1. The year 2016/17 and the first two quarters of
The volatility in SACU receipts over recent the year 2017/18 saw the government facing
years has put a strain on the fiscus (MoF, serious cash flow challenges and questions
2017), resulting in the government running were raised on the role of the Central Bank
budget deficits since 2014, which are above in ameliorating the situation. In light of
the 3 per cent recommendation of the these concerns, the departure point would
Protocol on Finance and Development for be to empirically establish how monetary
SADC which was stipulated in 2012. From a policy changes affect macroeconomic fiscal
budget surplus of 3.7 per cent in 2012/13, variables, hence this study. To the best
the government ran a deficit of 1.2 per cent knowledge of the authors and information
in 2014/15, shooting up to 12.4 per cent available, there is no published study in
in 2016/17 in pursuit of an expansionary the country, which has tried to establish
stance. This has led to an increase in public the relationship between monetary policy
debt levels. changes and fiscal variables. Specifically,
the study seeks to determine the effects of
Figure 1: SACU receipts as a Percentage of monetary policy shocks on macroeconomic
Total Expenditure and the Budget Surplus as aBulletin
Research fluctuations
Volume 2 with a special focus on fiscal
Percentage of GDP variables, namely; budget deficit, tax
15 100 published study in the country, which has tried to
revenue and domestic debt.
10 establish the relationship between monetary
80
The
policysignificance
changes and of the
fiscal study is
variables. that a
Specifically,
5
60 relationship between monetary policy
Per cent
Per cent
0
the studyand
changes seeks to determine
its effects the variables
on fiscal effects of
40
2000/01
2002/03
2004/05
2006/07
2008/09
2010/11
2012/13
2014/15
2016/17
-5
will be established
monetary and hence
policy shocks add to the
on macroeconomic
body of knowledge,
fluctuations with a which
specialwill assist
focus onpolicy
fiscal
-10 20
makers to better engage especially during
variables,
tough namely;times.
economic budget deficit, tax revenue and
-15 0
domestic debt.
The rest of the study is subdivided into four
Surplus/(deficit) (% of GDP)
The significance
sections. of the study
In section 2, theis that a relationship
paper presents
the review
between of literature
monetary between
policy changes andmonetary
its effects
policy shocks and its effects on fiscal
On average, total public external debt for on fiscal variables
variables whiles will
the bemethodology
established and of hence
the
On average, total public external debt for
Swaziland
Swazilandaveraged about
averaged 15.1 per
about 15.1cent
perof cent
GDP study is presented in section 3. The results
add to the body of knowledge, which will assist
of GDP and analysis
makersare presented
engageinespecially
section 4during
and
for the for the 2000
period periodto 2000
2016,to whilst
2016, public
whilst policy to better
public domestic debt averaged 3.7 per cent section 5 constitutes the conclusion together
domestic debt averaged 3.7 per cent of GDP for toughpolicy
with economic times.
recommendations.
of GDP for the same period. Even though
the same period. Even though these figures are
below the 60 per cent debt-to-GDP ratio The rest of the study is subdivided into four
threshold stipulated in the Protocol on Finance sections. In Bank
Central section 2, the ©paper
Of Swaziland 2018
61
presents the
review of literature between monetary policy
and Development for SADC members, the
2.0 REVIEW OF LITERATURE (FAVAR) framework to investigate the

Rosoiu (2015), Fry-McKibbin and Zheng impact of monetary and fiscal policy shocks
(2012), Belviso and Milani (2003) and on US macroeconomic fluctuations. These
Bernake, Boivin and Eliasz (2003; 2005) authors defined monetary policy shocks as
assert that Vector Autoregressive (VAR) temporally shocks in the short-term interest
models have been largely used in measuring rates such as the Federal fund rate. The
the transmission of monetary policy to monetary policy shock results revealed that
the economy and has delivered plausible the US Federal budget (government taxation
information. Even though the VAR approach less government expenditure) responds with
has delivered useful information in measuring a surplus for the first quarter followed by a
the effects of monetary policy, it is said to deficit for the next 27 quarters before the
have limitations in its implementation. One economy returns to a budget surplus. The
major limitation of the VAR, which has been shock also had an immediate significant
widely cited in a number of papers, is that negative impact on output and absorption.
it is a low dimensional model since it can Government taxation also declined as a
incorporate only about six to eight variables result of the decrease in consumption. The
yet there are numerous underlying factors debt-to-GDP ratio also increased after 16
affecting the economy (Bernake, Boivin & quarters, which is a result of an increase in
Eliasz, 2005). the budget deficit.
Bernake, Boivin and Eliasz (2005) developed Muscateli et al. (2004) reported results
a Factor Augmented Vector Autoregression similar to Fry-McKibbin and Zheng (2012)
(FAVAR) model in order to minimize the for the US and further stated that fiscal
limitations of the VAR which have been variables adjust with a lag to the output
widely raised in most papers. The FAVAR effects caused by a contractionary monetary
combines the structural VAR and factor policy. Fry-McKibbin and Zheng (2012)
analysis for large data sets and was found reported that monetary policy also moves
to be more efficient in the analysis of the other interest rates like the treasury bills in
monetary transmission mechanism than a the same direction. Using a FAVAR, results
simple structural VAR. Indeed, a number of by Dungey and Fry (2010) revealed that in
recent studies like Rosoiu (2015), Jushan, Australia, a contractionary monetary policy
Lina and Kunpeng (2014) and Fry-McKibbin results in reduced government revenue and
and Zheng (2012) have used the FAVAR given is also associated with reduced debt-to-GDP
its properties. The FAVAR has been heralded ratios.
as one of the most plausible methodological
approach which is more inclusive in terms Haug, Jedrzejowisz and Sznajderska (2013)
of economic data to depict underlying combined the monetary and fiscal policy in
economic factors. A FAVAR model needs large a Structural Vector Auto Regression (SVAR)
data sets and is more appropriate in data and found that a positive shock on monetary
rich countries and hence this study could not policy (interest rate) had a significant
use it. The Structural Vector Autoregressive negative effect on GDP. This effect was
(SVAR) approach was used instead, which significant for more than 12 months. However,
remains one of the mostly used models in the shock did not have a significant effect
determining the effects of monetary policy on inflation, government expenditure and
using a few variables. revenue. The ordering of the variables by
Haug, Jedrzejowisz and Sznajderska (2013)
Fry-McKibbin and Zheng (2012) used the was different from that of Fry-McKibbin
Factor Augmented Vector Auto Regression and Zheng (2012) with the fiscal variables

ordered last whiles Fry-McKibbin and Zheng and the results revealed that, had Turkey
(2012) ordered them first. not undertaken counter cyclical and
discretionary interest rate cuts, the
Investigating the implications of monetary economy would have shrunk by -6.2 per
policy shocks on government debt cent instead of the -4.8 per cent that was
management in Barbados, Moore and Skeete realized. The Bank of the Republic of Turkey
(2010) reported that there is a positive reduced the policy rate by 1025 basis point
relationship between the bank rate and between November 2008 and November
treasury bills’ interest rate. An increase in 2009. During the financial crisis period,
the bank rate was found to be positively Turkey also adopted a floating exchange rate
correlated with rises in treasury interest system and the results revealed that if this
rate. Moore and Skeete (2010) also found exchange rate system was not adopted, the
a positive relationship between treasury economy would have shrunk by 8 per cent in
bills and the minimum savings rate which 2009. In the US, Mishkin (2009) argues that
is another monetary policy tool used by the the accommodative monetary policy stance
Bank and this relationship was even stronger adopted by the Federal Reserve Bank during
than that of the Bank rate. Using a SVAR, the financial crisis played an important role
Dlamini and Skosana (2016) also found a in ameliorating the effects of the recent
positive relationship between the discount financial crisis.
rate and the treasury bills interest rates in
Swaziland. Greenlaw et al. (2013) argue that monetary
policy can play a significant role in ensuring
Jannsen, Potjagailo and Wolters (2015) a sustainable outcome if the fiscal position
assert that monetary policy effects differ is moving in a positive direction from an
between crisis and non-crisis times as the unsustainable path to a sustainable path.
monetary transmission mechanisms might Greenlaw et al. (2013) further state that
be different due to credit constraints since fiscal consolidation is contractionary,
and additional effects of increases in the standard prescription for monetary
uncertainty. They found that in emerging policy is to ease during fiscal consolidation.
economies and Organisation for Economic Results by Hellebrandt, Posen and Tolle
Co-operation and Development (OECD) (2012) after examining historical records of
countries, expansionary monetary policy is fiscal consolidation in advanced economies
more effective on increasing GDP during a between the years 1978 and 2009 revealed
recession period of a financial crisis than that successful consolidations tend to be
in none-crisis times. Monetary policy was accompanied by higher monetary easing as
found to be having a negligible effect on measured by the interest rate. The authors
GDP during the recovery period. Findings further note that the easing has to start at
by Saliba (2013) revealed that monetary and the onset of the consolidation programme.
fiscal policy had a positive and significant
effect on growth of small economies post- Greenlaw et al. (2013) note that in a case
recession period. Saliba (2013) also found of fiscal dominance, a central bank has
monetary measures to be more important got no power to avoid the consequences
than fiscal measures in mitigating the effects of an unsustainable fiscal policy. Similarly,
of a recession. Hellebrandt, Posen and Tolle (2012) posit
that monetary policy cannot be effective
Alp and Elekdag (2011) investigated the when fiscal policies are unsustainable. They
impact of the monetary policy in Turkey further state that there is an argument that
during the financial crisis of 2007/2009 any monetary loosening should be preceded

63
(SVAR) model. Estimatin
(SVAR) model.
The SVAR in this study’s model(interest
contains
C E N T R A L B A N K O F S WA Z I L A N D | R E S E A R C H B U L L E T I N V O L U M E 2Research Bulletin Volume
The SVAR in this study’s model contains
endogenous variables.seven recursivel
The matrix form o
method necessitates the use of a large set ofResearch
data Bulletin Vol
decompo
endogenous variables.equation The matrix Research form
of theBulletinVAR is ofspecified
Volume the 2 asasfollows;follow
method
which is necessitates
not available theinuse theofcountrya largehence set ofthe data paramete decom
by fiscal commitment and method centralnecessitates
bank’s of
equation McKibbin
thetheuse VAR of and aislarge Zheng
specified set of(2012). as follows;
data However,
decomposition this istotal applied taxa to
study 𝑝𝑝 Autoregressive
toughness is important for inducing fiscal which method isused not aavailable
necessitates Structural 𝐴𝐴𝑌𝑌 inthe
𝑡𝑡
Vector
=the ∑
use 𝐵𝐵
country
of
𝑖𝑖=1 𝑖𝑖 𝑡𝑡−𝑖𝑖𝑌𝑌
a large +
hence 𝜀𝜀 𝑡𝑡 …………………..(1)
set the Estimatinparam
which is not available in thewhich country hence the parameter matrix A0.
consolidation. of data
(SVAR) 𝑝𝑝 model. is not available in the country expenditu
𝐴𝐴𝑌𝑌 𝑡𝑡 = ∑used
study 𝑖𝑖=1 𝐵𝐵 𝑖𝑖 𝑌𝑌
a 𝑡𝑡−𝑖𝑖 +
Structural 𝜀𝜀𝑡𝑡 …………………..(1) Vector
Research Autoregressive
Bulletin Volume 2 (interest
study used a Structural hence the study
Vector Autoregressive
Where; usedYa is Structural
the vector Vectorcontaining Estimt
Estimating the impact(Deb GDP of m
Investigating the impact of monetary method
(SVAR) model.
policy (SVAR)
necessitates Autoregressive
The SVAR model.
the use in of this (SVAR)
a largestudy’s model.
set modelof datacontains decomposition seven recursive
is applied
endogenous variables. theA is 7 a square (inter
in 24 countries, results by Bech, Gambacorta Where; Y is the vector containing (interest rate), factorsmat
Fry-McKibb (C
which is not endogenous
available in the variables.
country The
hence matrix
the form parameter of the matrix as Afollow 0.
and Kharroubi (2012) revealed that
The SVAR an easy
in thisThe
endogenous The
study’s SVAR SVAR
variables.
model in this in this
Astudy’s
coefficients
contains study’s
is aseven model
square model contains
to berecursively contains
estimated.
matrix ofseven orderedɛ is the arecur vec
vari
monetary policy during a “normal” downturn
study used a equation seven endogenous
Structural of Vector
the VARAutoregressive is specified
variables. The matrix adopts
as follows; total tax a
endogenous endogenous
variables. The matrix variables.
serially
form ofof The matrix
uncorrelated, Estimating
form of
andof mutually the the impact asortho fo o
leads to a stronger recovery coefficients
afterwards.
(SVAR) model.
form to ofbethe estimated.
equation ɛthetheis VAR a as isfollows;
vector specified total governme
McKibbin
expenditu
𝑝𝑝
𝐴𝐴𝑌𝑌of𝑡𝑡 =the ∑as𝑖𝑖=1 𝐵𝐵𝑖𝑖 𝑌𝑌𝑡𝑡−𝑖𝑖 + 𝜀𝜀𝑡𝑡 …………………..(1) (interest
However, an accommodative equation monetary
of the VAR
serially
as
equation follows;
is specified
uncorrelated, VAR
follows;
structural
and is specified
mutually as total
disturbances follows;
orthogonal and prate),
taxation revenue
is the Fry-McK
total
numb (Tt)
policy was found to be having reduced GDP
augmente (Deb
The SVAR𝑝𝑝 in this study’s model contains seven expenditure recursively (GNE ordered
t), the expen the
ratio
effects in a case of a down turn associated = ∑𝑖𝑖=1 𝐵𝐵𝑖𝑖Where;
𝐴𝐴𝑌𝑌𝑡𝑡structural Y ∑is 𝑝𝑝 lags.the vector containing the 7
disturbances
𝑌𝑌𝑡𝑡−𝑖𝑖 +𝐴𝐴𝑌𝑌𝜀𝜀𝑡𝑡𝑡𝑡 …………………..(1)
= 𝐵𝐵 and𝑌𝑌
𝑖𝑖 𝑡𝑡−𝑖𝑖 p
+ is
𝜀𝜀 the
…………………..(1) number of factors
studygover also (C
with a financial crisis. Deleveraging endogenous was variables. The 𝑖𝑖=1 matrix form 𝑡𝑡of the GDPas(Deb follows;t), realtotal GDP, inflat
endogenous variables. A is a square matrix of adopts GDP a(
found to be instrumental for Where;
equation lags.
subsequent
Y is of the the VAR vector
is specified containing as follows; the 7 total taxation afterrevenue real
recovery in the case of a financial crisis. coefficients
Where; Where;Y Y is tois A the
be vector form
estimated.
thereduced vector ɛ isfactors
containing
containing ofa the vector (C)
the theand
model of the interest
7 7 isMcKibbin factor
obtain
endogenous variables. A is a square matrixA of
of is the disc
𝑝𝑝 endogenous variables. isa asquare
square
adopts expenditure
matrixan ordering (GNE t),similthe
Explaining the reduced effectiveness 𝐴𝐴𝑌𝑌𝑡𝑡 =of∑endogenous
serially
𝑖𝑖=1 𝐵𝐵𝑖𝑖 𝑌𝑌𝑡𝑡−𝑖𝑖 + variables.
uncorrelated,
𝜀𝜀𝑡𝑡 …………………..(1)
multiplying andA ismutually
both sides orthogonal
bymatrix A -1 and it is
augmente adopt
specif
financialAcrisis,
monetary policy during the coefficients reduced
to be estimated.of form coefficients ofɛ the is toa model be
vector estimated. is obtained
of isGDP a vector by(Deb t), real GDP, in
coefficients
structural to be
disturbances estimated. and p isɛand theMcKibbin
is a
number vector andof ofZhengstructural (201
Bech, Gambacorta and Kharroubi Where; (2012) Y is theand of serially
vector uncorrelated,
follows;
containing mutually study McKib als
serially uncorrelated, mutually -1 and the
orthogonal it is
7
specified factors (C) and the and inte
stated that this might be a functionmultiplying of the serially lags. bothuncorrelated,
orthogonal sides by A
structural and disturbances
mutually
augmented andas
orthogonal p is factors
after
the
−1 ∑ 𝑝𝑝 𝑡𝑡 real
𝐺𝐺augm
endogenous
structural disturbances variables.
the number A
and p is of is a thesquare
lags. 𝑌𝑌
number = matrix𝐴𝐴 of
of 𝑖𝑖=1study 𝐵𝐵 𝑌𝑌
𝑖𝑖 adopts + 𝑒𝑒 ………………...(2
𝑡𝑡an private
ordering𝑒𝑒
𝑇𝑇𝑡𝑡 sects
𝑡𝑡 𝑡𝑡−𝑖𝑖
also adds
impairment of the transmission channel. follows;structural disturbances and p is the number of is𝑒𝑒𝐺𝐺𝐺𝐺𝐺𝐺
the
study dis
lags.coefficients to be estimated. 𝑝𝑝
ɛ is a vector
where is a vector of
after of
McKibbin
realserially GDP uncorrelate
and
and Zheng
𝑒𝑒
the 𝑡𝑡
last v(
−1
Adam and Billi (2008) analyzed a non- =AA𝐴𝐴reduced
𝑌𝑌𝑡𝑡 lags. reduced ∑𝑖𝑖=1 𝐵𝐵form form
𝑌𝑌
𝑖𝑖 𝑡𝑡−𝑖𝑖
of+ of the
𝑒𝑒 the model
………………...(2)
𝑡𝑡orthogonal model is obtained
is obtained by structura
𝑒𝑒 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡 =
serially uncorrelated, and mutually augmented factors afterTh
𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡and
cooperative monetary and fiscal policy multiplying by multiplying bothnot bothnecessarily
sides bysides A-1 and byit A is -1the and
is orthogonal,
specified discount it as is rate 𝑒𝑒 (Dr).
reduced
A reduced where
structural form ofis
disturbances a vector
specified
the model and as of is isserially
pfollows; the number
obtained uncorrelated,
by of structural butalso adds𝑒𝑒private 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
is
𝑒𝑒 𝐺𝐺𝑡𝑡thes
game within a standard stochastic general
follows; disturbances. In thatstudy regard, VAR isthe specified
[ 𝑒𝑒relatio𝑒𝑒 𝑇𝑇𝑡𝑡 ]
𝐷𝐷𝐷𝐷 a
equilibrium model withoutmultiplying capital and
lags. notbothnecessarily A
sides reducedby A-1 and form it𝑝𝑝isof
orthogonal, the model
specified reduced
as is obtainedafter form real GDP by and𝑒𝑒struct the
𝐺𝐺𝐺𝐺𝐺𝐺 𝑡𝑡 la
established that when fiscal policy is 𝑌𝑌𝑡𝑡 = 𝐴𝐴−1 ∑between the reduced𝑒𝑒 𝐺𝐺form
𝑖𝑖=1 𝐵𝐵𝑖𝑖 𝑌𝑌𝑡𝑡−𝑖𝑖 + 𝑒𝑒𝑡𝑡 ………………...(2)
𝑡𝑡 VAR1 0residuals 0 𝑒𝑒 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
0 𝑡𝑡 0 (=
follows; multiplying both sides by A -1 and it is is specified
𝑇𝑇𝑡𝑡 the discount 𝑎𝑎 as1 0rate 0 (Dr 0
determined before monetary policydisturbances. each In that regard, the uncorrelated,
relationship 𝑒𝑒 21 𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺 𝑡𝑡
where is a vector structural of serially shocks 𝑒𝑒(𝜀𝜀
𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡
) can but
𝑎𝑎31 be 𝑎𝑎32Where1
expresse
𝑒𝑒 0 the
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑒𝑒0𝐺𝐺𝑡𝑡
period, the monetary authority A𝑌𝑌 reducedshould
−1 ∑ form
𝑝𝑝
follows; of the model is obtained by 𝑡𝑡
structural VAR is specifie
𝑡𝑡 =between
𝐴𝐴 𝑖𝑖=1 𝐵𝐵where
the𝑖𝑖 𝑌𝑌𝑡𝑡−𝑖𝑖 + 𝑒𝑒𝑡𝑡 ………………...(2)
reduced is a form vectorVAR of seriallyresiduals uncorrelated,
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
𝑒𝑒( ) 𝑡𝑡 and = 𝑎𝑎41 𝑎𝑎42 𝑎𝑎43[ 𝑒𝑒1 𝑒𝑒]0𝑇𝑇𝑡𝑡 𝐷𝐷𝐷𝐷
focus exclusively on stabilizingmultiplying inflation.both notbutsides necessarily
notby A 𝑝𝑝follows:
necessarily
-1 and orthogonal,
it is specified orthogonal, reduced
as 𝑒𝑒 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
reduced form 𝑎𝑎51 𝑎𝑎52 𝑎𝑎53 𝑎𝑎54𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺
a 𝑎𝑎vector 1
o
where is a vector of serially −1 uncorrelated,
∑ but
They argue that since too much inflation is disturbances. 𝑌𝑌 𝑡𝑡 = 𝐴𝐴 𝐵𝐵
𝑖𝑖=1 𝑖𝑖 𝑡𝑡−𝑖𝑖 𝑌𝑌 + 𝑒𝑒𝑡𝑡 ………………...(2) 𝑒𝑒 𝑎𝑎
𝑒𝑒 𝑡𝑡 61 162 063 64
𝐺𝐺 𝑎𝑎 𝑎𝑎 0𝑒𝑒 65 𝑎𝑎
𝐷𝐷𝐷𝐷𝐷𝐷
0
follows; structural shocks (𝜀𝜀In form disturbances. 𝑡𝑡 ) that can regard, Inbe expressed
that regard,
the [relationship
𝑒𝑒 𝐷𝐷𝐷𝐷 ]𝑒𝑒 𝑇𝑇as the
𝑡𝑡 [𝑎𝑎71 𝑎𝑎72 21the
𝑎𝑎173 𝑎𝑎74 0 𝑒𝑒 𝑎𝑎 0
𝐺𝐺𝐺𝐺𝐺𝐺
generated by lack of monetary notcommitment,
necessarilywhere orthogonal,
relationship is a reduced
vector
between of formreduced
serially
the uncorrelated, form 𝐺𝐺𝐺𝐺𝐺𝐺VAR but Where right 75
th
𝑎𝑎 𝑎𝑎 1 0
𝑃𝑃𝑃𝑃𝑃𝑃
an endogenous fiscal policy requires follows: an −1 ∑ between
𝑝𝑝 the reduced form VAR residuals 𝑒𝑒(𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 ) 𝑡𝑡and 31 32 𝑒𝑒 𝐷𝐷𝐷𝐷
𝑡𝑡
𝑌𝑌 𝑡𝑡 = 𝐴𝐴 𝐵𝐵
residuals 𝑌𝑌 + 𝑒𝑒 ………………...(2)
𝑖𝑖 𝑡𝑡−𝑖𝑖 ( 𝑡𝑡 ) and structural shocks 𝑒𝑒 𝑡𝑡 = 𝐴𝐴 𝜀𝜀 …………………….……
0( 𝑡𝑡 ) can 41coefficient
𝑒𝑒 = 𝑎𝑎 𝑎𝑎
a42vector 𝑎𝑎 43 𝑒𝑒 1
[
inflation conservative centraldisturbances. In that 𝑖𝑖=1 regard, the relationship
banker. not necessarily
be expressed
structural shocks as orthogonal,
follows:
(𝜀𝜀𝑡𝑡 ) can but be Wherereduced
expressed 𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡
form
the left hand side 𝑎𝑎 𝑎𝑎 𝑎𝑎 53 of 𝑎𝑎5
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 as 𝑎𝑎
51 52
where is a vector
between the reduced form VAR residuals ( ) and of serially uncorrelated, 𝑒𝑒 the
𝑎𝑎 𝑎𝑎right 𝑎𝑎6
61
structural
62 63
disturbances.
follows: In that regard, the a vector relationship
[ 𝑒𝑒 𝐷𝐷𝐷𝐷of ]residuals [𝑎𝑎71 𝑎𝑎72 in𝑎𝑎73 the 𝑎𝑎7
3.0 METHODOLOGY not necessarily
structural shocks (𝜀𝜀𝑡𝑡 ) can𝑡𝑡 be 0expressed
𝑒𝑒
orthogonal, = 𝐴𝐴 𝜀𝜀
Based 𝑡𝑡 …………………….……..(3)
reduced on the
asform Cholesky decomposition coefficien
Wher o
between the reduced form VAR residuals the right( hand ) and side
The is the
ident sq
disturbances. In that regard,reduced the relationship formdecomposition
VAR, the studyofimposes structura
aconst vect
3.1 The Structural Vector follows: Based on the Cholesky Where
coefficients the left
associated hand withside
structural shocks 𝑒𝑒𝑡𝑡 = 𝐴𝐴 0 𝜀𝜀
) can
(𝜀𝜀𝑡𝑡VAR, 𝑡𝑡 …………………….……..(3)
bestudy expressed as this stud
Autoregression Model (SVAR) between the reduced
Based on the Cholesky the form
reduced VAR residuals
form
that decomposition (
define matrix A0 of )
the and as imposes
athe lower triangular rim
a vector of residualsThethe iden
Fry-McKibbin and Zheng (2012) and Naceur, follows: constraints that define matrix Astructural 0 as a lower shocks throughinth
structural shocks 𝐴𝐴0 𝜀𝜀(𝜀𝜀 𝑡𝑡 ) can be expressed
The identification as scheme follows Analyzing the or
Boughrara and Ghazouani (2009) assert reducedthat𝑒𝑒𝑡𝑡 = form
triangular …………………….……..(3)
𝑡𝑡VAR, the
matrix.
Based on the Cholesky decomposition study The imposesidentification constraints the schemeright
of the hand this
side coeffiisstud th
The identification of
cycles, the SVA
empirical analysis of the effects of follows:
monetary follows the original
that define reduced matrix form A0 VAR, aspaper a lower
the
paper
by
study Sims
triangular
by (1980),
imposes
Simscoefficients
matrix.
(1980),
constraints whereby Analyzing
associatedthe struct ChF w
policy have been largely investigated with whereby the𝑒𝑒 Choleski = 𝐴𝐴 𝜀𝜀 decomposition
…………………….……..(3) this study is is largely info
Based on the Cholesky decomposition Central
𝑡𝑡 of𝑡𝑡 the
0Bank of Swaziland © 2018 shocks
structural governme
cycles,throug
Vector Autoregressive (VAR) models. The As applied
identification
that definetomatrix theP acontemporaneous
scheme Ag0 easfollows a lower triangular theAnalyzing parameter
original matrix. the effects The
of fisc id
alluded to in the limitations reduced
of theform study VAR, the 𝑒𝑒
matrix = 𝐴𝐴 𝜀𝜀
studyA0imposes …………………….……..(3)
. constraints governm
𝑡𝑡 0 𝑡𝑡 that othe
and the literature review, the mostpaper ideal Based byTheSims identification
(1980), scheme wherebyfollows the cycles, theThe
Choleski original
identification
Fatas and this ofMiho the
that define matrix A0 as a on lower thetriangular Cholesky matrix. decomposition of the that othe
methodology for the study would have beenBank
Central paper
Estimating by Sims
of Swaziland the©(1980), impactwhereby
2018 of monetary thethis Choleski
policy
study is largely
The Based on
identification the scheme Choleskyfollows decomposition the original of the government spendingAnaly first
a FAVAR model as cited in Rosoiu (2015), Central P a g e reducedshockBank form (interest VAR,
of Swaziland therate), study imposes
© 2018Fry-McKibbin and constraints
reduced form(1980), VAR, a g the
P Zheng e study imposes constraints ordered thatAnalyzing other variables the effects likeofo
cycles
Jushan, Lina and Kunpeng (2014) paper and
by Sims Fry- whereby (2012) the recursively
Choleski the
that define matrix A0 as a lower triangular cycles, matrix. Fatas and M
thatBank
Central define matrix A©0 as
of Swaziland 2018 a lower triangular matrix. gover
The identification scheme follows the original spending
64
Page government
Central Bank Of Swaziland ©The
2018 identification scheme follows the original that
paper by Sims (1980), whereby the thatCholeski other variables lik
paper by Sims (1980), whereby the Choleski
ms (1980),
large set of data whereby is applied
decomposition the to the
Cholesky
contemporaneous
untry hence the parameter matrix A0.
osition is applied Cto the
ENT R A L contemporaneous
B A N K O F S WA Z I L A N D | RESEARCH BULLETIN VOLUME 2
Autoregressive
Estimating the impact of monetary policy shock
er matrix A. Thus, the order of the variables
(interest rate), Fry-McKibbin and Zheng (2012)
rcontains
to manyseven studies
variablesused
from infirstthe
recursively ordered context
the variables
to last
from of
first to last
as follows; total Fry-Mckibbin and Zheng (2012) ordered
rix form of the as follows; expenditure
total government (Gexpenditure (Gt),
advancedgovernment
ns follows; economies, including t), total taxation
Sims absorption (gross national expenditure) after
revenue (Tt), real
total taxation gross(Tnational
revenue t), real gross expenditure
national the fiscal variables in order to capture the
and is as follows;
…………..(1)
(GNE output
t), the
expenditure (GNEt(GDP),
ratio ),held inflation
by held
the ratio thebypublic to toGDP
the public contemporaneous effects of public spending
(Deb t), (Deb
GDP realt), GDP, inflation
real GDP, inflation(Inf(Inftt), augmented
), augmented and tax changes on output and absorption,
), money supply
ntaining the 7 factors
(M2), private sector credit
(C) and the interest rate (rt). This hence this study also orders absorption as
factors (C) and the interest rate (rt). This study
study adopts an ordering similar to that of the third variable. According to Fry-Mckibbin
nd the
quare policy
matrix of rate
adopts(DR). The
an ordering matrix
similar form
Fry-McKibbin and Zheng (2012) but without
to thatofof Fry-
and Zheng (2012), government spending and
is a vector of McKibbin and Zheng (2012)and but the without the
Rally model can the
be augmented
expressed as factors
follows: inflation taxation affects the level of public debt
orthogonal rate. This study
augmented factors also
and the adds private
inflation sector
rate. This which by extension affects GDP. The debt-
the number of credit
studyas a adds
also variable
privateafter real as
sector credit GDP and the
a variable to-GDP ratio is therefore ordered fourth
𝐺𝐺𝑡𝑡
last variable to be ordered
after real GDP and the last variable is the discount
to be ordered in the model whiles GDP is ordered fifth.
1 rate 0 (Dr).0 The 0matrix 0 form 𝜀𝜀 𝐺𝐺𝐺𝐺𝐺𝐺
of
𝑡𝑡
the structural The inclusion of the debt ratio is important
is the discount rate (Dr). The𝐶𝐶𝐶𝐶𝐶𝐶
𝐶𝐶𝑡𝑡 𝑎𝑎21 VAR 1 is 0
specified 0 𝜀𝜀 matrix
0 as follows; 𝑡𝑡 form of the
because it provides a feedback loop between
is obtained by
𝑡𝑡 = 𝑎𝑎31 𝑎𝑎32structural
1 VAR 0is specified
0 as𝜀𝜀follows;
𝑀𝑀𝑀𝑀𝑡𝑡
the fiscal variables and the public debt level
it is specified as
𝑃𝑃𝑡𝑡 𝑎𝑎41 𝑎𝑎42 𝑒𝑒 𝑎𝑎43 1 10 0 00 𝜀𝜀0 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅
𝐺𝐺𝑡𝑡 0 0 𝑡𝑡 𝜀𝜀 𝐺𝐺𝑡𝑡 (Fry-Mckibbin & Zheng, 2012) and improves
𝑡𝑡 ] [𝑎𝑎51 𝑎𝑎52 𝑒𝑒 𝑎𝑎53 𝑎𝑎 𝑎𝑎𝑎𝑎54 1 10] [0 𝜀𝜀 𝐷𝐷𝐷𝐷
𝑒𝑒 𝑎𝑎
𝑇𝑇𝑡𝑡 1
0 021
31
0 0 0
0 0
32
𝑡𝑡 ] 𝜀𝜀
𝜀𝜀 𝑇𝑇𝑡𝑡
𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 the stability of the model (Fry & Pagan,
…………...(2) 𝑒𝑒 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡 = 𝑎𝑎41 𝑎𝑎42 𝑎𝑎43 1 0 0 0 ∗ 𝜀𝜀 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡 …..(4) 2005). What happens in the economy in
𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 𝑎𝑎51 𝑎𝑎52 𝑎𝑎53 𝑎𝑎54 1 0 0 𝜀𝜀 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡
ncorrelated, but 𝑒𝑒 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑎𝑎61 𝑎𝑎62 𝑎𝑎63 𝑎𝑎64 𝑎𝑎65 1 0 𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
terms of GDP developments is more likely
[ 𝑒𝑒 𝐷𝐷𝐷𝐷 ] [𝑎𝑎71 𝑎𝑎72 𝑎𝑎73 𝑎𝑎74 𝑎𝑎75 𝑎𝑎76 1 ] [ 𝜀𝜀 𝐷𝐷𝐷𝐷 ] to impact on private sector credit hence
he left hand
reduced form side of the equation contains a
private sector credit is ordered sixth in the
he relationship
f residuals inWhere
the reduced
the
Where form,
lefthand
the left hand and
side
side of on thecontains
of the
the equation equation model. As in Fry-Mckibbin and Zheng (2012),
esiduals ( ) and the study orders the interest (discount rate)
contains
a vectoraofvector ofinresiduals
residuals the reducedinform,
the and
reduced
on
nd side is
expressed the squared
as form, andhand matrix
on side
the (A0) of is the last. This study runs three parsimonious
the right is right hand
the squared side
matrix (A0) of
squared matrix (A 0) of coefficients associated
models, and replaces the discount rate with
nts associatedcoefficients
with lagged
associatedvariables and and
with lagged variables
reserve requirement in the second model
with lagged variables and structural shocks
structural shocks through the column vector (ɛ ). and the liquidity requirement which are
al shocks through
………….……..(3) throughthe
thecolumn
column vector
vector (ɛ).
The identification of the SVAR model followed in other policy rates used by the Central Bank
nometric identification of monetary
Thethisidentification
study is largely of thepolicy
informed SVAR
by model
literature.
of Swaziland.
position of the
followed
is constraints
oses crucial any inmodel
to Analyzing this study is largely informed
specification,
the effects of fiscal policy on business
Impulse response and variance decomposition
by literature. Analyzing the effects of fiscal
cycles, Fatas and Mihov (2001) ordered analysis were carried out to determine
g SVARs. The
iangular matrix. policy
SVAR on identification
business cycles,exercise Fatas and Mihov
government spending first on
ws the original (2001) ordered government spending first
the assumption the effects of policy rate shocks in the
in this paper isthat explained as follows;
other variables like output, cannot affect estimated model. The impulse response
by the Choleski on the assumption that other variables like
output, cannot affect government spending function in a VAR analyses traces the effects
ordering of contemporaneously.
output and price Fry-McKibbin
level at theand 72 |
Zheng on the system when the model receives a
(2012) also ordered government expenditure shock of say one standard deviation. The
nning is because they react to an innovation variance decomposition reveals the amount
first on the same bases hence this study
e monetary policy rate with
also orders a lag due
government to their first in
expenditure of contribution of each variable to other
the model. Results by Nxumalo and Hlophe variables in the system. In essence, it shows
movement in nature.
(2016) revealed that the Swazi Government the amount of the forecast error variance of
follows a spend and tax approach hence each of the variables that can be explained
this study orders tax revenues second after by exogenous shocks to the other variables
government expenditure. in the system.
58 | P a gFry-McKibbin
e
and Zheng (2012) ordered tax second since
government expenditure is likely to affect The study uses monthly data spanning from
taxes. 2000M01 to 2015M12 to examine the impact of

65

monetary policy changes on macroeconomic 4.3. Diagnostics Tests
variables with a special focus on fiscal In all three models the results of the
les were in logs except for distributed. The inverse roots of the
variables. Secondary data were sourced Portmanteau Test for serial autocorrelation
dget from the Central
deficit, Bank of was
which Swaziland, Ministry indicate that
autoregressive there is no serial autocorrelation
polynomials of the models are
of Finance and the Central Statistics Office whilst the LM test indicates that there is no
nce itusing
hadannual
negative
reports.figures presented serialoncorrelation.
Figure 2However, and they all three indicate
models that all
failed the normality test, indicating that
4.0 STRUCTURAL VAR RESULTS three models
the residuals are are stable.
not normally Lutkepol distributed. (1991) and
The inverse roots of the autoregressive
tests4.1. Unit Root Tests Baum (2013)
polynomials assert of the that a model
models are presented is stable if all
The unit root test results indicate that on Figure 2 and they indicate that all three
e Johansen test, the study the allroots have modulus less than one and
variables save for the government budget models are stable. Lutkepol (1991) and
deficit (aslag
the optimal percentage
length. ofThe GDP) were non- Baum
therefore (2013) assert
lie within the that circle. a model is stable if
stationary at levels and hence needed to be all the roots have modulus less than one and
Criterion (SC)
differenced once inand be stationary. The therefore lie within the circle.
order tothe
variables are therefore integrated of Figure
order 2: Inverse Roots of Characteristic
uggest
onean optimal
while lag order
the government Polynomials
budget deficit was Figure 2: Inverse Roots of Characteristic
integrated of order zero. All variables were Polynomials
aike Information
in logs except for Creterion
the government budget Model 1 Model 2 Model 3
Model 1 Model 2 Model 3
deficit, which was modelled at levels since
l Prediction Error (FPE)
it had negative figures but was stationary.
Inverse Roots of AR Characteristic Polynomial Inverse Roots of AR Characteristic Polynomial
1.5 1.5
der 2. Given the different 1.0 1.0
4.2. Cointegration Tests 0.5 0.5
Before uses
the study conducting the Johansen
the AIC and test, the 0.0 0.0
study starts by estimating the optimal lag

ted a length.
lag order
The of 2.
-0.5 -0.5
Schwartz Bayesian Criterion
-1.0
(SC) and the Hannan-Quinn (HQ) suggest
-1.0
an optimal lag order of 1 whilst the Akaike -1.5 -1.5
cts the appropriate model, -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0
Inverse Roots of AR Characteristic Polynomial
-0.5 0.0 0.5 1.0 1.5
Information Creterion (AIC) and the Final 1.5
Prediction
stimation Errorthree
of the (FPE) suggest
most a lag of order 1.0
2. Given the different suggested lag orders,
threethe models indicated
study uses the
the AIC and the FPE, which
0.5
suggested a lag order of 2. 0.0
ation and the trace statistic -0.5
The study then selects the appropriate -1.0
at model 3 isinvolves
model, which the the
most
estimation of the -1.5
three most relevant models. All three models -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
most five cointegrating

indicated the presence of cointegration
Source: own estimations
andown estimations
Source:
mum theEigenvalue
trace statistic results
results revealed that
4.4. Impulse Response Functions and
model 3 is the most appropriate with 4.4. at most Impulse Response Functions and the
the Variance Decomposition
e at most two cointegrating
five cointegrating vectors. The Maximum
Eigenvalue results indicate that there are at Variance Decomposition
4.4.1. The Impulse Response for a Shock
and 3.mostBased on the trace
two cointegrating vectors in model 2
on the Discount Rate
and 3. Based on the trace statistic 4.4.1. results, The Impulse Response for a Shock on the
l 3 was selected as theasbest The impulse response results presented
model 3 was selected the best model for
on Figure 3 indicate that a one standard
this study, and the variables were confirmed Discount Rate
y, and the variables were
to be cointegrated.
deviation shock to the discount rate does
The impulse response
not have results
a significant presented
effect on Figure
on all the
egrated.
3 indicate that a one standard deviation shock to
ests 66 Central Bank Of Swaziland © 2018
the discount rate does not have a significant effect

variables under consideration over a 24 requirement does not have a significant Response to Cholesky One S.D. Innovations ± 2 S.E.
requirement and the discount rate shocks. The Response of SURPLUS_DEFICIT to DLDR
Response of DLT AX to DLDR
months’ period, including the fiscal variables effect on the fiscal variables, just like
Response of DLDR to DLDR
.03
.20
.04
.15
.03 .02
.10
shockreserve
also does not have a and
significant effect on
.02
(government budget deficit, tax revenue and the requirement the discount
.01
.05
.01
.00
.00 .00
-.05
-.01
-.01
the public domestic debt). rate shocks. The shock alsofordoes not have
-.10
-.02 2 4 6 8 10 12 14 16 18 20 22 24
2 4 6 8 10 12 14 16 18 20 22 24
the other variables except private sector

2 4 6 8 10 12 14 16 18 20 22 24
a significant effect on the other variables

Response of DLGNE to DLDR
Response of DLDEBT to DLDR Response of DLGDP to DLDR
.015
.08 .0100
credit,
Research Bulletin Volume 2which has a negative and significant
.010 .0075
.04
Figure 3: Impulse Response for the Shock on except

Bulletinfor private sector credit, which has a
.005 .0050
.0025
Research Volume 2
.00
.000
.0000
-.005 -.04
-.0025
the Discount Rate negative

response. and andsignificant response.
requirement the discount rate shocks. The

-.010
-.08 -.0050
2 4 6 8 10 12 14 16 18 20 22 24
2 4Response
6 8 of10 12 14 16 18 to
20DLDR
22 24 2 4 Response
6 8 of DLT
10 12 AX
14 to 16
DLDR
18 20 22 24
SURPLUS_DEFICIT
Response of DLDR to DLDR
.03
.20
.04
requirement anda the discount rate

on shocks. T
.15
.03 .02
.10 Response of DLT AX to DLDR

Response of SURPLUS_DEFICIT to DLDR
shock also does not have significant effect

.02
ResponseResponse oftoDLDR
of DLPSCR DLDRto DLDR .01
.05 .03
.01 .20
.06 .04
Figure
Figure 5: Impulse Response
Responseforforaa Shock
.00
5: Impulse Shock
.00 .15 .00
.03 .02
-.05
.04 -.01
.10
shock also does notforhave a significant effect

-.01
.02 -.10
-.02 2 4 6 8 10 12 14 16 18 20 22 24
2 4 6 8 10 12 14 16 18 20 22 24 .01
the other variables except private sector

.02 2 4 6 8 10 12 14 16 18 20 22 24 .05
.01
Liquidity
Liquidity Requirement
Requirement
.00
.00 .00
.00
Response of DLGNE to DLDR -.05
-.01 Response of DLDEBT to DLDR Response of DLGDP to DLDR
-.02 .015 -.01
-.10 .0100
.08 2 4 6 8 10 12 14 16 18 20 22 24
-.02
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
Source: Own calculations credit, the
whichother
has avariables
negative except for private sec
and significant
.010 2 4 6 8 10 12 14 16 18 20 22 24 .0075
.04
Response of DLLIQRQ to DLLIQRQ
.005 .0050
Response of SURPLUS_DEFICIT to DLLIQRQ Response of DLTAX to DLLIQRQ
.04
.00 .0025 .03
.000 Response of DLGNE to DLDR .15
Response of DLDEBT to DLDR .0000
Response of DLGDP to DLDR .03
.015
-.005 -.04
.08 .0100 .10 .02
-.0025 .02
response.
credit, which has a negative and signific
-.010
4.4.2. Impulse Response for a Shock on Reserve

.010 -.08 -.0050 .0075
2 4 6 8 10 12 14 16 18 20 22 24 .01 .05
2 4.04 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24 .01
.005 .0050
.00 .00
.00 .0025 .00
.000 -.01
-.05
.0000
-.005 Response of DLPSCR to DLDR -.04 -.02
-.01
-.0025 2 4 6 8 10 12 14 16 18 20 22 24 -.10
Requirement
2 4 6 8 10 12 14 16 18 20 22 24
response.
.06 2 4 6 8 10 12 14 16 18 20 22 24
-.010
Figure 5: Impulse Response for a Shock

-.08 -.0050
2 4 6 8 10 12 14 16 18 20 22 24
.04 2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
.02
Similarly, to the response of a shock on the

.00
-.02
.06 2 4
Response of DLPSCR to DLDR
6 8 10 12 14 16 18 20 22 24
Liquidity Requirement Response
Response to Cholesky One of DLDEBT to DLLIQRQ
S.D. Innovations ± 2 S.E.
.012
Response of DLGDP to DLLIQRQ
Source: Own calculations

Response of DLGNE to DLLIQRQ
Figure 5: Impulse Response for a Shock

.100
.04 .020 Response of DLLIQRQ to DLLIQRQ .008
Response of DLTAX to DLLIQRQ
Response of SURPLUS_DEFICIT to DLLIQRQ
.04 .075
.015 .03
discount rate, the impulse response results

.15
.02 .03 .050 .004
.010
Liquidity Requirement
.10 .02
.02 .025
.00 .005 .000
4.4.2. Impulse Response for a Shock on Reserve

.01 .05
.000 .01
.000
-.02 .00 .00 -.004
-.025
2 4 6 8 10 12 14 16 18 20 22 24 -.005
Response to Cholesky One.00S.D. Innovations 2± 24 S.E.
6 8 10 12 14 16 18 20 22 24
indicate that
Source: Own a shock on the reserve requirement
calculations
-.01
-.05 -.050
Source:
-.010
Own calculations
-.02 Response of DLLIQRQ to DLLIQRQ 2 4 6 8 10 12 14 16 18 20 22 24
2 4
2
6
4
8
6
10 12
8 10
14
12
16
14
18
16
20
18
22
20 22 24
24 -.10 Response of SURPLUS_DEFICIT to2DLLIQRQ
-.01 Response of DLTAX to DLLIQRQ
Requirement
4 6 8 10 12 14 16 18 20 22 24
.04 2 4 6 8 10 12 14 16 18 20 22 24
.03
.15
.03
.10 .02
has no significant effect on the

for fiscal variables.
.02
4.4.2. Impulse Response a Shock on Reserve

.01 .05
.01
Similarly, to the Response

4.4.2. Impulse response offora ashockShock onon the Response of DLPSCR.00
to DLLIQRQ Response of DLGDP to DLLIQRQ
.00
.012
.06 Response of DLDEBT to DLLIQRQ .00
Response of DLGNE to -.01
DLLIQRQ -.05
.100
The results also indicate that the shock has an

.020 -.02 .008
.04 -.01
.075 -.10
Reserve Requirement
2 4 6 8 10 12 14 16 18 20 22 24
discountRequirement
.015 2 4 6 8 10 12 14 16 18 20 2
rate, the impulse response results

2 4 6 8 10 12 14 16 18 20 22 24
.050 .004
.02
.010
.025
.005 .000
.00 .000
Similarly, toa shock

the response of expenditure,
a shock on
.000
insignificant effect on gross

on thenational
-.025 -.004
-.005 2 4 6 8 10 12 14 16 18 20 22 24
indicate that reserve

of requirement
-.02
Similarly, to the response a shock on theSource:

2 4 6 8 10 12 14 16 18 20 22 24 -.050
-.010 2 4 6 8 10 12 14 16 18 20 22 24

2 4 6 8 10 12 14 16 18 20 22 24 Response of DLGDP to DLLIQRQ
theanddiscount rate,credit.
the impulse response Own calculations Response of DLGNE to DLLIQRQ
Response of DLDEBT to DLLIQRQ
.012
GDP private sector

.100
.020 .008
has no significant effect on the fiscal variables.

.075
.015
results
discountindicate rate, thatthe aimpulse
shock onresponse
the reserve results4.4.4. Variance Decomposition for the Discount
.050 .004
.010
Response of DLPSCR to DLLIQRQ
.025
the 4.4.4. Variance Decomposition for the

.06 .005 .000
.000
The results also

requirement hasindicate that the shock
no significant effecthas on an
.000
.04
-.025 -.004
-.005 2 4 6 8 10 12 14 16 18 2
indicate that a shock on the reserve requirementDiscount Rate

.02
Rate
-.050
-.010 2 4 6 8 10 12 14 16 18 20 22 24
2 4 6 8 10 12 14 16 18 20 22 24
fiscal variables. The results

nationalalso indicate
.00
insignificant effect on gross expenditure, -.02
The variance decomposition resultsin

2 4 6 8 10 12 14 16 18 20 22 24

has no
that
Figure significant
theImpulse
4: shock has effect on the fiscal
an insignificant
Response effect variables.
on The variance decomposition results presented
GDP and private sector credit.for the Shock on presented in Table 1 indicate that a one
Response of DLPSCR to DLLIQRQ
gross
the Reservenational expenditure, GDP and private 4.4.4.
Requirement
.06
The results also indicate that the shock has an TableVariance

standard 1 indicate Decomposition
deviation that a one
shock
for the Discount
to standard
the discount deviation
has
.04
sector credit.
.02
Response of DLT AX to DLRSVRQ
Response of DLRSVRQ to DLRSVRQ Response of SURPLUS_DEFICIT to DLRSVRQ
Rate
.03
a minimal
shock to the effect
discount on the
has a fiscal
minimal variables.
effect on A
the
.08 .15
.00
insignificant effect on gross national expenditure,

.06 .10 .02
.04 -.02
.05
.01 2 4 6 8 10 12 14 16 18 20 22 24
.02
shock Source:
on the own calculations
discount rate causes a 2.9 per
.00
The variance decomposition

A shockresults presented
discountin rate
.00
Figure 4: Impulse
ImpulseResponse
Responsefor forthe
the Shock onon
.00
Figure 4: Shock fiscal variables. on the

-.05
-.02
-.01
GDP and private sector credit.

-.04 -.10 2 4 6 8 10 12 14 16 18 20 22 24
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
the Reserve Requirement

the Reserve Requirement cent, 1.4 per cent and 1.5 per cent variation
Table 14.4.4. indicate that a one
Variance standard deviation
Decomposition for
.020
.015
Response of DLGNE to DLRSVRQ
causes a 2.9
Response of DLRSVRQ to DLRSVRQ
per cent, 1.4 per
on government budget deficit, tax revenues cent and 1.5 per the
centDiscou Response toResponse
Cholesky
.100
.075
One S.D.
of DLDEBT Innovations ± 2 S.E.
to DLRSVRQ
Response of SURPLUS_DEFICIT to DLRSVRQ

.03
.012
Response of DLGDP to DLRSVRQ
Response of DLT AX to DLRSVRQ
shock to the discount has a minimal effect on the

.08 .15
.008
and domestic public debt over a 24deficit,

months’
.010
on Rate
.06 .050
.10 .02
variation government budget tax

.004
.005 .04 .025
.05
.01
.000 .02 .000
.00
.000
-.005 .00 .00

-.025
period,
fiscal respectively.
variables. A shockOver on the thediscount
same period,
rate
-.05
-.02 -.004
-.010 -.050
-.01 2 4 6 8 10 12 14 16 18 20 22 24
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
-.04 -.10 2 4 6 8 10 12 14 16 18 20 22 24
The and variance decomposition

public debtresults over apresented
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
Figure 4: Impulse Response for the Shock on the revenues domestic 24

causesshocka 2.9 per
Response of DLGNE to DLRSVRQ
wouldcent,cause
1.4 peracentvariation
and 1.5 ofper0.5
centper Response of DLDEBT to DLRSVRQ
the Reserve Requirement

Response of DLPSCR to DLRSVRQ
.012
months’
cent to period,
the 1gross respectively.
national a Over
thatexpenditure, the same0.4 deviat
.020 .100
Table indicate one standard

.06
.015 .075
.008
.04 .010 .050
variation on government budget deficit, tax

.004
.005
.025
.02
per cent thetoshock

GDP and 3.8cause
per cent to private
.000 .000
.000 Response of DLT AX to DLRSVRQ
Response of DLRSVRQ to DLRSVRQ Response of SURPLUS_DEFICIT to DLRSVRQ
-.005 -.025
period, thewould a variation of effect

0.5 on
.00 .03
shock to discount has aover

minimal
.08 .15 -.004
-.010 -.050
2 4 6 8 10 12 14 16 18 20 22 24
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
-.02 .06 .02
.10
revenues and domestic public debt a 24the

2 4 6 8 10 12 14 16 18 20 22 24
Source: own calculations sector credit. These results indicate that

.04
.05
.01
.02
.00
per cent torate

the gross national expenditure, 0.4discount
per
.00 .00
discount fiscal largely

variables. affects
A shock private
on the sector r
-.05
-.02 Response of DLPSCR to DLRSVRQ
months’ period, respectively. Over the same

-.01
.06 -.10
-.04 2 4 6 8 10 12 14 16 18 20 22 24
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
4.4.3. Impulse Response for a Shock on

.04
credit
cent tothe hence
GDP and it 3.8
is an effective monetary
perper cent to private sector
.02
period, causes shock a 2.9would cent,

cause a1.4 per cent
variation of and
0.5 1.5 per c
.00

Response of DLGNE to DLRSVRQ Response of DLDEBT to DLRSVRQ
policy instrument.
-.02
Source:Liquidity Requirement
2 4 6 8 10 12 14 16 18 20 22 24 .012
.020 .100
own calculations
Source: Own calculations
.015 .075
credit. These results indicate that the0.4discount

.008
.010 .050
per centvariation
to the gross national
on expenditure,
government budgetper deficit,
.004
.005 .025
The results on Figure 5 indicate that a one

.000 .000
.000
4.4.3. Impulse Response for a Shock on

-.005 -.025
rateto largely affects 3.8private sector credit hence

sector it is
-.004
-.010 -.050
4.4.3. Impulse Response for a Shock on cent

2 4 6 8 10 12 14 16 18 20 22 24
GDP and per cent to private

2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24
standard Liquidity
deviation shock
Requirement to the liquidity revenues and domestic public debt over a
Liquidity Requirement an effective monetary policy instrument.
credit. These results indicate that the discount
Response of DLPSCR to DLRSVRQ
months’ period, respectively. Over the sa

.06
The
The results
requirementresultsdoes on not
on
.04
Figure
have55aindicate
Figure indicate
significant that a aone
effect
that one
on
.02
rate largely affects private sector credit hence it is

thestandard deviation shock shocklike toto the
the liquidity Tableperiod,
1: Variance Decomposition
the shock would cause for the
a variation of
.00
fiscal variables,
standard deviation
-.02
just the liquidity

reserve
an effective Rate
monetary policy instrument.
2 4 6 8 10 12 14 16 18 20 22 24
Source: own calculations Discount

requirement does not have a significant effect on per cent to the gross national expenditure, 0.4
P a4.4.3.
the Impulse
g e fiscal Response
variables, just for
likea Shock on
the reserve Table 1: Variance Decomposition for the
67
cent
Discount Rateto GDP and 3.8 per cent to private sec
Liquidity Requirement Central Bank Of Swaziland © 2018
Central Bank of Swaziland © 2018 credit. These results indicate 75that
| the disco
Page
The results on Figure 5 indicate that a one
Table 1: Variance Decomposition for the credit and 0.2 per cent variation on GDP
Discount Rate over the same period.
Period Discount Gov. Tax GNE Debt GDP PSCR
rate Deficit
Table 3: Variance Decomposition for the
1 100.0 0.000 0.0 0.00 0.00 0.00 0.00 Liquidity Requirement
4 93.02 0.637 0.9 0.28 1.02 0.23 3.87 Liquidity Gov. Tax GNE Debt GDP PSCR
8 90.92 1.673 1.36 0.35 1.53 0.26 3.90 Req. deficit
12 90.14 2.345 1.37 0.44 1.54 0.31 3.86 1 100.0 0.00 0.00 0.00 0.00 0.00 0.00
16 89.75 2.674 1.36 0.50 1.53 0.34 3.84 4 97.82 0.45 0.37 0.17 0.06 0.01 1.12
8 97.69 0.48 0.40 0.21 0.06 0.01 1.14
20 89.57 2.828 1.36 0.54 1.53 0.35 3.83
12 97.69 0.48 0.40 0.21 0.06 0.01 1.13
24 89.48 2.900 1.36 0.55 1.53 0.36 3.83
Source: own calculations 16 97.68 0.48 0.40 0.21 0.06 0.02 1.13
20 97.68 0.48 0.40 0.21 0.06 0.019 1.14
4.4.5. Variance Decomposition for the 24 97.67 0.49 0.40 0.21 0.06 0.02 1.14
Reserve Requirement Source: own calculations
The results presented in the table below

indicate that a one standard deviation 5.0 CONCLUSION AND
shock on the reserve requirement causes RECOMMENDATIONS
a variation of 0.4 per cent on government
budget deficit, 0.5 per cent on tax revenues 5.1. Conclusion
and 0.1 per cent on domestic public debt The main purpose of this study was to
over a 24-month period. Over the same determine the effects of monetary policy
period, the shock causes a variation of 0.4 changes on fiscal macroeconomic variables;
per cent, 0.1per cent and 0.1 per cent to however, other variables were included for
the private sector credit, gross national model specification and stability purposes.
expenditure and GDP, respectively. The study considers shocks on all three
monetary policy rates employed by the
Table 2: Variance Decomposition for the Bank, namely; the discount rate, liquidity
Reserve Requirement requirement and the reserve requirement.
Reserve Gov. Tax GNE Debt GDP PSCR Other variables considered include
Req. deficit government budget deficit, tax revenues,
1 100.00 0.000 0.00 0.00 0.00 0.00 0.00 gross national expenditure, public domestic
4 98.564 0.354 0.47 0.09 0.06 0.04 0.41 debt, GDP and private sector credit.
8 98.445 0.397 0.51 0.10 0.07 0.06 0.43
12 98.438 0.398 0.51 0.10 0.07 0.06 0.44 All the variables were found to be integrated
16 98.437 0.398 0.51 0.10 0.07 0.06 0.44 of order one, except for government budget
20 98.436 0.399 0.50 0.10 0.06 0.06 0.42 deficit, which was integrated of order zero.
24 98.436 0.399 0.52 0.104 0.068 0.060 0.427 The lag length selection criteria chose 2 as
the optimal lag length and the Johansen
4.4.6. Variance Decomposition for the Test revealed that there are at most 5
Liquidity Requirement cointegrating vectors. Three SVAR models
The results presented on Table 3 indicate were estimated using the three policy rates
and they all passed the diagnostics checks,
that a shock on liquidity requirement causes
namely; LM test, Portmanteau test and the
a variation of 0.5 per cent, 0.4 per cent and
stability test.
0.1 per cent to government budget deficit,
tax revenue and domestic public debt over
The impulse response results for the shock
a period of 24 months, respectively. The
on the discount rate indicate that a one
results also indicate that the shock causes standard deviation shock does not have a
a 1.1 per cent variation on private sector

significant effect to the variables under REFERENCES

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The Relationship between 1. INTRODUCTION

Household Debt and Economic Since the dawn of the 2007/2008 financial
Growth in Swaziland crisis researchers and policymakers all over
the world have become cautious of the
levels of household debt. The increased
Ntobeko S. Dlamini12 and
household indebtedness which continues to
Zana S. Mabuza13
be heightened by the growing demand for
loans is exacerbated by commercial banks’
Abstract
obvious drive to make excessive profits.
Irrespective of the fact that household debt
This paper explores the relationship between
has caused a stir in the global economy, it
credit extended to households and economic
is still considered as an important factor
growth in Swaziland, by employing the
towards economic growth through its
ARDL-bounds testing procedure to long run
contribution to consumption expenditure.
cointegration. Using quarterly time series
The reality that confronts many countries,
data over the period 2006 to 2015, the study
however, is that enormous household debt
found that household credit had a long run
levels are not an ideal factor to economic
negative impact on economic growth in
activity, instead, they may signal a looming
Swaziland. The study further found that
financial bubble which would eventually
consumer price index, population growth
bring a negative effect on the performance
and residential building plans approved were
of the economy (Hammad et al, 2016).
key determinants of household credit in the
long run with coefficients of 0.70, -1.74 and
Even though the global financial crisis caught
0.23, respectively. The error correctional
many by surprise, it must have prompted
terms for the models relating to GDP and
policymakers to draw lessons that would have
household credit were -0.07 and -0.83,
prevented the repeat of the episodes that
respectively, implying that about 7 per cent
emerged thereafter and the spillover effects
and 81 per cent of disequilibria in the short
on the global economy. Disappointingly, data
run converges back to long run equilibrium
from the International Monetary Fund (IMF)
in the long run. The study recommends for
indicates that household debt is still on a rise
close monitoring of household credit market
for both developed and developing countries.
and the control of excessive households’
This shows that financial intermediaries still
exposure to credit.
require a significant level of monitoring
in light of the chaos that erupted in 2007.
Key words: ARDL, Household credit, GDP
Wildauer (2016) clarifies that the chaos
did not only demonstrate that credit is an
important macroeconomic aggregate but it
also made a difference which sectors are
taking on debt and that a highly indebted
household sector ultimately triggers a
recession.
12
Ntobeko Dlamini is an Economist, Policy Research,
in the Policy Research and Macroeconomic Analysis
at the Central Bank of Swaziland.,reachable at While debt accumulation may be seen as a
Ntobekod@Centralbank.org.sz. problem, its importance towards household
13
Zana Mabuza is an Economist, Policy Research, in consumption and economic growth should
the Policy Research and Macroeconomic Analysis at not be ignored. The availability of credit
the Central Bank of Swaziland.,reachable at Zanam@ not only makes it easier for households to
Centralbank.org.sz. advance their expenditure objectively,

71
but it also helps cash strapped consumers Prinsloo (2002) claims that household debt
to quicken payments for present needs ratios are an important analytical tool
than to prolong purchases into the future. which allows policymakers and economic
Nevertheless, increased borrowing that researchers to evaluate a household’s
escalates to unsustainable levels raises financial situation and to predict the
concerns about an individual’s ability to outcome of final consumption expenditure.
repay what they owe, especially in the In Swaziland, the household consumption
event of an unexpected change in the expenditure currently represents about
economic environment (Tudela & Young, 76 per cent of the gross domestic product
2005). Martinez- Carrascal and Del Rio (2004) (Central Statistics Office, 2015).
states that high debt levels imply a higher
debt service burden which can restrict the 1.1 Household Debt in Swaziland
household’s access to additional external Total household debt in Swaziland comprises
fund hence leaving a household defenseless of three components which include; credit
against unexpected shock to their income, extended to the housing sector, motor
assets or interest rates. vehicles, and other unsecured loans. As
shown in Figure 1, credit extended to the
To a number of countries household housing market contributes the largest share
consumption expenditure accounts for a of total household credit followed by loans
larger share of their gross domestic product extended for other unsecured loans such as
(GDP). According to the World Bank (2016), education and personal. Credit extended for
among high income countries final household the acquisition of motor vehicles remains
consumption expenditure contribution to the least in terms of contribution to the
gross domestic product between the year total household sector credit.
2000 and 2015, averaged an estimated
59.9 per cent while heavily indebted poor Figure 1: Household Credit Share
countries recorded an estimated 74.2 per
cent contribution. In the same period, the
Sub-Saharan African region’s consumption of
households grew slightly above that of high
income countries to eventually close at 66.3
per cent of GDP.
Following the onset of the 2007/2008

financial crisis it transpired that in the
United States and United Kingdom, extreme
easing of lending conditions created an
insatiable level of demand for mortgage Source: Central Bank of Swaziland.
loans which led to unsustainable growth in
household debt and further fueled higher As shown in Figure 2, household credit has
debt-service burdens and increases in house been rapidly increasing and is considered
prices. Thus the condition presented by the as one of the largest components of private
financial crisis provided a unique opportunity sector credit. By analyzing the evolution of
for countries to continuously examine private sector credit over the last decade, we
developments in their household debt and to observe an upward trajectory in household
have a deeper understanding of what causes credit, in which the sector contributed
household debt to rise or fall in any existing between 30-45 per cent between 2005 and
debt business cycle. 2015. The major attributing factors towards

the substantial growth in household credit credit as shown by the household credit to
include a decline in prime lending rates from GDP ratio increasing from around 7% in 2006
a high of 9 per cent in 2006 to a low of 5.8 per peaking at 9.5% in the third quarter of 2011,
cent in 2015 combined with the competitive before declining to around 8.2% in 2013
credit products aggressively offered by before rising again to around 9.4% in 2015.
commercial banks to the household sector. This accommodative monetary policy stance
According to Khan et al (2016), recent favoured household credit as it generally
trends also show that the cost of living has accelerated during this period.
increased significantly especially due to
rising food prices which put upward pressure The expansion in lending to households
on household consumption especially among requires the Central Bank to respond
low and middle income population. Such appropriately through restrictive monetary
increases restrict household consumption policies to contain unwarranted increases
and may compel a household to acquire in credit extended to the household sector
credit in order to maintain or enhance which safeguards the sustainability of
consumption. However, increased household the country’s financial system. The Bank
borrowing relative to household income does this conscious of the fact that its
raises concerns about a household’s ability focus is not limited to the dynamics in
to service the loan, and has economic the household sector but the economy as
implications. a whole. The Central Bank of Swaziland is
ultimately tasked with the responsibility of
Figure 2: Share of Private Sector Credit ensuring price stability and sound financial
systems that ensures a long-term viable
growth path. However, notwithstanding the
Bank’s presence, household credit remains
elevated.
Figure 3: Household Credit to GDP Ratio

10.00
9.50
9.00
8.50
per cent
8.00
Source: Central Bank of Swaziland. 7.50
7.00
Figure 3 shows the ratio of credit extended 6.50
to households to GDP between the period 6.00
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
2006 and 2015. Household credit started

the period 2006 at a 7.1 per cent ratio to
GDP, climbing steadily over the years. The Source: Central Bank of Swaziland.
2007/2008 recession saw the Central Bank
of Swaziland adopting restrictive monetary The remainder of this paper is organized as
policies to discourage household liquidity. follows: section 2 presents the theoretical
The period after the crisis marked an easing and empirical literature, section 3 discusses
of monetary policy stance with the Bank the methodology which is divided into
reducing the discount rate from 11 per cent several sections of data type and model
in 2008 to 5.75 per cent in 2015 in order to specification. Section 4 provides an in-depth
induce growth in the domestic economy. analysis of the estimation results obtained
The result was an increase in household by applying the ARDL model. Finally, section

73
5 concludes the research by providing Minsky’s financial instability hypothesis.

appropriate recommendations for policy and The hypothesis according to Rahman and
further research. Masih (2014) argues that a financial crisis
is rampant in a capitalist society because
2.0 LITERATURE REVIEW periods of economic prosperity encourages
This section provides a theoretical and borrowers and lending institutions to be
an empirical review of literature behind more certain about the prospect of financial
household debt, its determinants and the sustainability which compels a reckless kind
relationship that exists between household of behavior in the financial system. This
debt and economic growth. Empirical excess optimism creates a financial bubble
literature on the study of household debt which at a later stage is highly likely to
and its attributes is still scanty for most burst. Minsky’s theory asserts that a key
African countries, non-existent in Swaziland apparatus that pushes an economy towards
which underscores the need to bridge the a crisis is the accumulation of debt by the
existing gap. The approach adopted and the private sector. The theory identifies three
variables selected for this study are based types of borrowers that contribute towards
on some of the studies that estimate the insolvent debt and these include: hedge
relationship in question. borrowers, speculative borrowers and Ponzi
borrowers. Given that financial markets
2.1 Theoretical Literature frequently acquire excess liquidity, the
The theories explaining the study of hypothesis gives emphasis to the importance
consumption and household debt can be of a central bank or government as a lender
traced back to the marginalist school of of last resort.
thought which saw consumers as individual
utility maximizing agents (Santos et al, The life cycle hypothesis as developed
2014). Given a set of tastes or preferences, by Irving Fisher, Rod Harrod, Albert Ando
income and price of goods and services, and Francis Modigliani who furthers the
the problem facing the consumer is that argument of debt accumulation by assuming
of selecting a combination of commodities that consumers are rational and forward
that would maximize or satisfy their needs. looking. The founding prescript of this theory
Consumers are therefore expected in is embedded on the general observation
theory to be rational thinkers and produce that consumption needs and income are
an option that maximizes their utility. This often unequal at various points in the
decision-making problem, as Santos et al life cycle. According to the theory, some
(2014) puts it, is not distinguished from households are priority driven and mainly
other economic problems, namely decisions go for large amount of debt to smoothen
made by producers who, given particular their consumption to acquire long lasting
prices for raw materials, outputs, level of commodities such as houses, cars among
technology and a budget constraint, come the many durables. The model thus foresees
up with a combination of inputs and prices that household consumption in each period
that will enable profits to be maximized. A is dependent on expectations about life
decision concerning credit and long-term time income. As a result, households will
consumption is also approached from the inevitably enter into debt during these
problem of individual utility maximization. periods when their incomes are extremely
low, mainly because they need to finance
The theoretical clarification on the effect of their existing consumption and will then
macroeconomic variables on household debt pay back these loans in periods when
and its implication is found in the Hyman their income is relatively high. In essence,

the model assumes that a household can A study in Australia which was conducted by
maximize utility over its lifetime subject to Meng et al (2011) explored the determinants
a budget constraint. of household debt by employing a Vector
Autoregressive (VAR) model. Findings of the
Another theory called the permanent income study revealed a positive and significant
hypothesis, developed by Milton Friedman impact of GDP, followed by house prices and
in 1957, also weighed in on the subject of the number of new dwellings on household
household credit and consumption. Friedman debt in Australia. Over and above that,
in this theory argued that consumption interest rates, unemployment rate and
should not depend on current disposable inflation were found to have a negative
income alone but on expectations relating effect on Australia’s household debt. From
to the total income which individuals expect the results, it was recommended that given
to earn during their lifetime. The model the large negative effect of uncontrolled
emphasized that consumers utilize the saving debt levels regulating and standardizing
and borrowing option to smoothen their the practice of mortgage financing could
consumption pattern in response to random limit the irresponsible behavior of financial
and temporary changes in their income institutions.
from year to year. From this perspective,
indebtedness is the result of a rational Rahman and Masih (2014) studied the
decision aimed at maximizing intertemporal relationship between household debt and
utility, now based on the wealth and income GDP, interest rate and house price in Malaysia
expected during the life cycle (Santos et al, using a Johansen test for cointegration.
2014). The results showed that there was a long
run positive relationship between house
Although rising household debt can be prices and household debt. In the short run,
attributed to the rationales advanced by changes in GDP, lending rates and house
the assertions highlighted above, there are prices according to the study findings could
many other important economic factors and not influence household debt.
reasons why household debt continues to
rise. One of the reasons relates to a drop in Khan et al. (2016) further explored the
real and nominal interest rates. The Bank of determinants of household debt in Malaysia
Canada (2012) claims that the upward trend by disaggregating the household sector
in household debt in recent years, especially into specific components of mortgage and
mortgage credit, is consistent with the growth consumer debt. By utilizing the bound
in population and ownership coupled with test for cointergration through the ARDL
improved mortgage affordability. Although modelling approach, the study revealed that
house prices may have risen, mortgage in the long run, a change in income level,
demand and financing has benefited from housing price and population had a positive
other factors such as income gains and lower impact on mortgage debt while a rise in
interest rates. interest rates and cost of living (consumer
price inflation) would exert a negative
2.2 Empirical Literature impact.
The discussion of the related literature is
provided in this section and mainly focuses Mutezo (2014) examined the relationship
on the main factors that influence household between household debt and consumption
debt among the developing economies spending in South Africa. Using the ARDL-
including the Southern African region and bounds testing approach the results revealed
the developed world. that there was a significant deterministic

75
relationship between household debt Correction Model to analyze the effect gross
and disposable income, net wealth and domestic product per capita, interest rates,
inflation. The results further indicated that inflation, household consumption and money
there was a long run relationship between supply had on household debt. Results from
household debt and income, interest rates this study showed that in the long run GDP
and inflation implying that low interest rates per capita, interest rates and money supply
and a general increase in household income determined changes in household debt in
during the period 2004-2011 supported high Botswana.
household indebtedness.
Panic (2010) in Sweden examined the
Cross country evidence from a study underlying factors that were responsible for
conducted by Coletta et al. (2014) of 32 the developments in the household debt to
countries which included 26 members of the disposable income ratio which had remained
European Union plus Japan, South Korea, relatively high for almost 30 years. Using the
Canada, Australia, New Zealand and the U.S. Engel-Granger two-step modelling approach
over the period 1995 to 2011 revealed that to cointegration, the results indicated that
household debt was highest in countries that household debt to disposable income ratio
had higher per capita GDP and household was determined by debt to assets, interest
wealth. The coefficient of GDP growth rate payments to disposable income and real
on the other hand was found to be negative estate price index in the long run. Inflation
and statistically significant, implying that was found to be a significant determinant
household debt is at its highest when only in the short run.
economic activity (growth rate) is at its Tu (2008) employed the multivariate
lowest. regression model to examine the lagged
effect of house prices and interest rates on
Mah et al. (2013) studied the household household debt to disposable income ratio in
debt and how it responded to shocks from New Zealand. Using data spanning the period
several macroeconomic variables over the from the first quarter of 1991 to first quarter
period 1985 quarter one to 2012 quarter 2008, the study observed that the 1980s
two. Using the Variance Decomposition and financial deregulation and the consequent
Generalized Impulse Response Function drops in interest rates and the increase in
analyses the study found that distortions in house prices were the main causes of the
the level of household debt in South Africa increased household debt in New Zealand.
were explained by the contributions in house
prices, household income, gross domestic A study by Hong (2011) explored the
product and the real prime rate. Based on determining factors of household
the study findings, the authors recommended indebtedness in the U.S. using quarterly data
that government should intervene by closely over the period of 1980-2010. The result
monitoring and properly managing the from a simple regression analysis showed
housing market to guard against excessive that the unemployment rate, interest rate,
credit to the housing sector. disposable personal income per capita,
share of retiring population and educational
Zimunya and Raboloko (2015) studied the attainment were negatively related to the
factors behind the growth of household debt household debt in the U.S. while housing
in Botswana. Using quarterly data from the prices, consumer confidence and share of
first quarter of 1994 to the second quarter working-age population were positively
2012, the study employed the Vector Error related to the household borrowing.

More recently, Wildear (2016) clarifies why

households in the U.S. were deeply indebted 3.0 METHODOLOGY AND DATA
in the last three decades. In his explanation, DESCRIPTION
the author first acknowledged that private
households in the U.S. took on large amount 3.1 Model Specification
of debt over the last three decades hence The primary focus of this study is to
understanding the forces behind the investigate the factors behind the rising
household debt trends is crucial in order to household debt and its impact on economic
design monetary and fiscal policies aimed at growth in Swaziland using the Autoregressive
reducing the prospect of another financial Distributed Lag (ARDL) model. This
crisis. Through an in-depth descriptive methodology is similar to studies by Kan et all
analysis of the borrowing patterns in the (2016) and Mutezo (2014). Studies presented
U.S. the study concluded that real estate in the literature review section suggest that
related borrowing explained a large part household debt as an independent variable is
of the increase in household debt over the a function of a varying set of macroeconomic
period 1989 to 2007. variables. These variables as revealed by the
empirical literature (in Hong, 2011; Tu,2008;
Kim (2016) investigated the effect of the Zimunya and Raboloko, 2015; Khan et al.,
aggregated and disaggregated household 2016 and Meng et al., 2011) include among
debt components on economic growth in others the: consumer price index, interest or
the U.S over the period 1951Q4 to 2009Q1. lending rates, gross domestic product, house
Using the vector error correction model the or mortgage prices, population statistics,
study revealed that both household debt and GDP per capita, money supply, working-age
consumer debt had a negative relationship population among the numerous variables.
with the level of output in the long run which
implied that debt accumulation depressed For the purpose of this study and considering
economic activity in the U.S. that data for this type of analysis is limited in
Swaziland, this study will focus on quarterly
Using data on 54 economies, Shim et al time series data of consumer price index,
(2017) established that household debt prime lending rate, gross domestic product,
boosts consumption and GDP growth in the building plans approved, population and
short run, with the bulk of the impact of household credit. The period of the study
increased indebtedness passing through covers 2006Q1 to 2015Q4.
the real economy in the space of one year.
However, the long-run negative effects of In order to analyse the relationship between
debt eventually outweighed their short- household debt and economic growth
term positive effects, with household debt in Swaziland, the following regression
accumulation ultimately proving to be a equations are used:
drag on growth. Research Bulletin Volu
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 Johans
Kilman (2016) investigated the effect of = 𝛽𝛽0 + 𝛽𝛽1 𝐿𝐿𝐿𝐿𝐿𝐿 𝐶𝐶𝐶𝐶𝐶𝐶 + 𝛽𝛽2 𝐿𝐿𝐿𝐿𝐿𝐿 𝑃𝑃𝑃𝑃 + 𝛽𝛽3 𝐿𝐿𝐿𝐿𝐿𝐿 𝐺𝐺𝐺𝐺𝐺𝐺
bound
household, corporate and government debt + 𝛽𝛽4 𝐿𝐿𝐿𝐿𝐿𝐿 𝑃𝑃𝑃𝑃𝑃𝑃 + 𝛽𝛽5 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿
on economic growth using panel data for 20 +µ (1) the m
advanced economies between 1980-2014. 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 integr
Through a dynamic panel data model, the = 𝛽𝛽0 + 𝛽𝛽1 𝐿𝐿𝐿𝐿𝐿𝐿 𝐶𝐶𝐶𝐶𝐶𝐶 + 𝛽𝛽2 𝐿𝐿𝐿𝐿𝐿𝐿 𝑃𝑃𝑃𝑃 + 𝛽𝛽3 𝐿𝐿𝐿𝐿𝐿𝐿 𝐻𝐻𝐻𝐻
+ 𝛽𝛽4 𝐿𝐿𝐿𝐿𝐿𝐿 𝑃𝑃𝑃𝑃𝑃𝑃 + 𝛽𝛽5 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 oppos
study concluded that there is a relationship
+µ (2) metho
between household debt and economic
growth in the long run. 3.2 Econometric Estimation Procedure regres
The study invokes three steps of estimation mutua
77
procedures which seek to examine the integr
determinants of household debt in Swaziland and be a
its impact on economic growth. The first step explan
Thus in order to avoid such cases, stationarity
For long run relationships, the ARDL normally
tests of the variables are performed. For this
involves two steps of estimation. The first step is
purpose, the Augmented Dickey-Fuller
C E N T R A L B A N test
K O F(ADF)
S WA Z I L A N D | RESEARCH BULLETIN VOLUME 2
to examine the existence of a long-run
is employed.
Research Bulletin Volume 2 cointegration relationship among the variables in
After
3.2 the order ofEstimation
Econometric integration has been
Procedure the equations
For long runin question using the
relationships, thebounds
ARDLtest.
ave used Based on the Cholesky decomposition of the
The study
established andinvokes
it is foundthreethat steps all oftheestimation
variables normally
On condition involvesthat two there steps ofexists
estimation.
long run
basis, procedures
this which form
reduced seek VAR, to examinethe study theimposes
The first step is to examine the existence of
constraints
aredeterminants
integrated of order zero I(0)debt
of household or order one I(1),
in Swaziland acointegration
long-run cointegration among therelationship variables, the amonglong-run
uraltheVAR.
and
second thatisdefine
its impact
step ontoeconomic
check matrix
forgrowth.
theA0presence
asThe
a lowerof triangular
first the variables
coefficients matrix. in theshort-run
and equations coefficients
in question are
step considers examining the nature of the using the bounds test. On condition that
his long
study The identification
run cointegration using the schemeboundsfollowstest the originalestimated
thereafter
data or order of integration (stationarity). there exists long run cointegration among
paper via a parsimonious ARDL
atrixmethod
form through
If variablesby the areSimsAutoregressive
(1980), Distributed
non-stationary we may the
whereby thevariables,
model which
Cholesky the developed
is long-run using coefficients
Hendry’s
have spurious regression. Thus in order to and short-run coefficients are thereafter
Lag (ARDL) estimation procedure which was general-to-specific modelling approach. The
lectedavoid as such decomposition
cases, stationarity is appliedtests oftothe the contemporaneous
estimated via a parsimonious ARDL model
developed
variables by are
Pesaran et al.(2001).
performed. For this Thispurpose,
method selection
which of the parsimonious
is developed using Hendry’s model is done using
general-
parameter matrix A . Thus, the order of the variables
hasthe Augmented
several advantages Dickey-Fuller
over other testfrequently
(ADF) is to-specific
the built-in ARDL modelling
operator in approach.
EViews 9. The
employed. selection of the parsimonious model is done
is similar approaches
employed cointegration to many studies such as the used in the context of
using
To test thefor built-in
long run ARDL operator ininEViews
cointegration model9. 1 and
After the
Johansen order
andVARs
Juselius inofand integration
advanced
Engel-Granger has been
economies,
Two Toincluding
test for long Sims run cointegration in model
established and it is found that all the 12,and the 2,following the following Unrestricted Error Correction
Unrestricted Error
Stepvariables
method.(1992),
The Engel-Granger,
are integrated and is of as for
order example,
follows;
zero I(0) is
output (GDP),
or Correction inflation
Models (UECM), are constructed:
the five Models (UECM), are constructed:
ordertoone
limited I(1), the
bivariate second
testing of step
typical is to check
runs. It
for
rate (CPI), money supply (M2), private sector credit
the presence of long run cointegration
matrix of
identifies only a single cointegration relationship 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥 𝐻𝐻𝐻𝐻t =
using the(PSCR)
bounds and test the method through
policy rate (DR). The the
𝛽𝛽0 matrix form of 𝑡𝑡−𝑖𝑖 + 𝛴𝛴𝑝𝑝 𝛽𝛽2𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡−𝑖𝑖 +
𝑝𝑝
of serially + 𝛴𝛴𝑖𝑖=1 𝛽𝛽1𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐻𝐻𝐻𝐻
amongAutoregressive
what might have Distributed
been many Lag relations(ARDL)
and 𝑖𝑖=0
estimation the SVAR model

procedure whichcan
it is also limited to one regression. Similarly, the
wasbedeveloped
expressed as𝛴𝛴𝑖𝑖=0 follows:
𝑝𝑝 𝑝𝑝
𝛽𝛽3𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝑃𝑃𝑃𝑃𝑡𝑡−𝑖𝑖 + 𝛴𝛴𝑖𝑖=0 𝛽𝛽4𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡−𝑖𝑖 +
structuralby Pesaran et al.(2001). This method has Research Bulletin Volume 2
several
Central advantages
Bank of Swaziland © 2018 over other frequently 𝑝𝑝 𝑝𝑝
𝛴𝛴𝑖𝑖=0 𝛽𝛽5𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡−𝑖𝑖 + 𝛴𝛴𝑖𝑖=0 𝛽𝛽6𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐵𝐵𝐵𝐵𝐵𝐵𝑡𝑡−𝑖𝑖 + 88 | concluding tha
P a gemployed
e cointegration approaches such
𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 1 0 0 0 𝜀𝜀𝑡𝑡−1𝐺𝐺𝐺𝐺𝐺𝐺
0 𝜑𝜑1 𝑙𝑙𝑙𝑙𝑙𝑙𝐻𝐻𝐻𝐻 + 𝑡𝑡𝜑𝜑2 𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡−1 + 𝜑𝜑3 𝑙𝑙𝑙𝑙𝑙𝑙𝑃𝑃𝑃𝑃𝑡𝑡−1 + models share m
he above as the Johansen𝐶𝐶𝐶𝐶𝐶𝐶and Juselius and Engel- 𝐶𝐶𝐶𝐶𝐶𝐶
Granger Two Step
𝑒𝑒 𝑡𝑡 𝑎𝑎21 The 1 Engel- 0 0 4 0 𝜀𝜀𝑡𝑡−1 5
𝜑𝜑 𝑙𝑙𝑙𝑙𝑙𝑙𝐺𝐺𝐺𝐺𝐺𝐺 + 𝑡𝑡 𝜑𝜑 𝑙𝑙𝑙𝑙𝑙𝑙𝐵𝐵𝐵𝐵𝐵𝐵 𝑡𝑡−1 + However, if th
𝑀𝑀𝑀𝑀𝑡𝑡 method.
= 𝑎𝑎 𝑎𝑎 1 0 0 𝑀𝑀𝑀𝑀𝜀𝜀𝑡𝑡
of policy
Granger, for example,𝑒𝑒 is limited 32
31 to bivariate 𝜑𝜑 6 𝑙𝑙𝑙𝑙𝑙𝑙𝑃𝑃𝑃𝑃𝑃𝑃 𝜀𝜀𝑡𝑡−1 𝑡𝑡 (3) lower bounds o
testing of typical
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡
𝑒𝑒 runs. It identifies 𝑎𝑎 41 𝑎𝑎 𝑎𝑎
42 only 43 a 1 0 𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅 𝑡𝑡
reject the nu
pretation [ 𝑒𝑒 𝐷𝐷𝐷𝐷𝑡𝑡 ] [ 𝑎𝑎 51 𝑎𝑎 52 𝑎𝑎 53 𝑎𝑎 𝛥𝛥𝛥𝛥𝛥𝛥𝛥𝛥 𝐺𝐺𝐺𝐺𝐺𝐺t =
]
54 1 𝑝𝑝 𝜀𝜀 𝐷𝐷𝐷𝐷𝑡𝑡 ]
[
single cointegration relationship among 𝑝𝑝
𝛽𝛽0 + 𝛴𝛴𝑖𝑖=1 𝛽𝛽1𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐻𝐻𝐻𝐻𝑡𝑡−𝑖𝑖 + 𝛴𝛴𝑖𝑖=0 𝛽𝛽2𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡−𝑖𝑖 + cointegration a
he model, what might have been many relations and it 𝑝𝑝 𝑝𝑝
𝛴𝛴𝑖𝑖=0 𝛽𝛽3𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝑃𝑃𝑃𝑃𝑡𝑡−𝑖𝑖 + 𝛴𝛴𝑖𝑖=0 𝛽𝛽4𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡−𝑖𝑖 + that the variab
is also limited to one regression. Similarly,
es by A-1 the JohansenWhere andthe Juselius
left hand approach, side of unlike
the equation
𝑝𝑝 𝑝𝑝
𝛴𝛴𝑖𝑖=0 𝛽𝛽5𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡−𝑖𝑖 + 𝛴𝛴𝑖𝑖=0 𝛽𝛽6𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐵𝐵𝐵𝐵𝐵𝐵𝑡𝑡−𝑖𝑖 +
contains a significant long
the bounds cointegration method, fails to 𝜑𝜑1 𝑙𝑙𝑙𝑙𝑙𝑙𝐻𝐻𝐻𝐻𝑡𝑡−1 + 𝜑𝜑2 𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡−1 + 𝜑𝜑3 𝑙𝑙𝑙𝑙𝑙𝑙𝑃𝑃𝑃𝑃𝑡𝑡−1 +
consider thevector
mixture of residuals
of regressors in the whichreduced
are form, and
𝜑𝜑4 𝑙𝑙𝑙𝑙𝑙𝑙𝐺𝐺𝐺𝐺𝐺𝐺 on the
𝑡𝑡−1 + 𝜑𝜑5 𝑙𝑙𝑙𝑙𝑙𝑙𝐵𝐵𝐵𝐵𝐵𝐵𝑡𝑡−1 + 4. Empirical Fi
not integrated of same order, that is, I (0) and 𝜑𝜑6 𝑙𝑙𝑙𝑙𝑙𝑙𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡−1 𝜀𝜀𝑡𝑡 (4)
right hand
I (1). As opposed to the otherside multivariate
is the squared co- matrix (A0) of 4.1 Stationarit
integration methods the
coefficients ARDL is applicable
associated with lagged where
where HD
variablesHDtt,, GDP GDPtt refers
andrefers toto the dependent The stationari
the dependent
whether the regressors are not integrated variables corresponding
variables corresponding to equation
to equation (3) βand determine if ea
(3) and (4),
d, but of notsame structural
order or mutually shocks through co-integrated the column andvector
(4), βϕand (ɛ). coefficients
coefficients
are considered non-stationary
are considered as column
but as long as the order of integration is not as column vectors of the parameters, while
urbances. higher than The one,econometric
there can still identification
be a long run ofΔmonetary
vectors of thepolicy parameters, while Δ is the first
is the first difference operator and ε is the
integration. Th
relationship between the explanatory and error difference term. operator and ε is the error term. study’s validity
e reduced shocks is crucial to any model specification,
dependent variable provided that they are methodology;
Once the estimation of equation (3) and (4) is
co-integrated (Sultan,
including 2012). Fundamentally,
SVARs. The SVAR identification Once the estimation exercise of equation (3) and (4) is variables to be
ocks this approach is suitable for smaller sample completed,thethe completed, F-statistic
F-statistic will bewill
computed to test
be computed make the mod
observationsfollowed
of between in this30-80.paper is explainedto as follows;
test
whether whether
the independent the independent
variables have variables
a long-
this study, the
run relationship with household debt and
 The ordering of output and price level at the and were foun
economic growth. This will be done by estimating
78 beginning is because they react to test was condu

Central Bank Of Swaziland © 2018 thean innovation
Wald or F-test for the joint significance of the
variables were
in the monetary policy rate with acoefficients
lag due of tothe
their
lagged variables at their levels
𝑒𝑒 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡 1 0 0 0 0 𝜀𝜀 𝐺𝐺𝐺𝐺𝐺𝐺𝑡𝑡
nsed
xpressed
1Relbe model
can
asexpressed
follows:
be can
asexpressed
𝐺𝐺𝐺𝐺𝐺𝐺 follows:
be
𝜀𝜀 0𝑡𝑡0 𝑡𝑡 𝜀𝜀 0𝑎𝑎021as expressed
𝐺𝐺𝐺𝐺𝐺𝐺 follows: as 𝐺𝐺𝐺𝐺𝐺𝐺 follows: as
𝐺𝐺𝐺𝐺𝐺𝐺 follows:
0 00𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶 𝑡𝑡 𝜀𝜀 0 𝑡𝑡 𝜀𝜀
1 0𝑡𝑡 0 0 𝜀𝜀 𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡
021 01
1 0𝑒𝑒 𝑀𝑀𝑀𝑀 𝜀𝜀 𝐶𝐶𝐶𝐶𝐶𝐶
0
𝑡𝑡 0𝑡𝑡 = 𝜀𝜀 𝐶𝐶𝐶𝐶𝐶𝐶
0𝑎𝑎0C31 0R𝑎𝑎A 32
𝑡𝑡E N𝜀𝜀T𝐶𝐶𝐶𝐶𝐶𝐶 𝑡𝑡L B 𝜀𝜀A𝐶𝐶𝐶𝐶𝐶𝐶
N K1 𝑡𝑡 O F S W 0A Z I L0A N D 𝜀𝜀 𝑀𝑀𝑀𝑀
| 𝑡𝑡 R E S E A R C H B U L L E T I N V O L U M E 2
132 𝑎𝑎
031 01032
𝑒𝑒 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 01
𝜀𝜀 𝑀𝑀𝑀𝑀𝑡𝑡0𝑡𝑡 𝜀𝜀 𝑀𝑀𝑀𝑀 0𝑎𝑎0𝑡𝑡41 𝜀𝜀 𝑀𝑀𝑀𝑀 0𝑎𝑎𝑡𝑡42 𝜀𝜀 𝑀𝑀𝑀𝑀 𝑎𝑎𝐺𝐺𝐺𝐺𝐺𝐺
𝑡𝑡
43 1𝐺𝐺𝐺𝐺𝐺𝐺 0 𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅𝑡𝑡
𝐺𝐺𝐺𝐺𝑡𝑡 1 0 0 0 1 𝐺𝐺𝐺𝐺𝐺𝐺
0 0 𝐺𝐺𝐺𝐺𝐺𝐺
0 00 𝐺𝐺𝐺𝐺𝐺𝐺
0 0 0
𝑎𝑎141 43 𝑎𝑎 0[142 𝜀𝜀43
𝑎𝑎
0
𝑡𝑡 1
𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅
𝜀𝜀𝐷𝐷𝐷𝐷 ]𝐶𝐶𝐶𝐶𝐶𝐶 [𝜀𝜀𝑎𝑎151𝑡𝑡𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅
𝑡𝑡𝜀𝜀0𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅
𝑡𝑡
0 𝑡𝑡
0𝜀𝜀𝑎𝑎52𝑡𝑡𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅
𝑡𝑡 𝜀𝜀𝑎𝑎53 𝑡𝑡
𝑎𝑎𝜀𝜀 54 𝑡𝑡 1] [ 𝜀𝜀 𝐷𝐷𝐷𝐷𝑡𝑡 ]
42
𝐶𝐶𝐶𝐶𝑎𝑎
43 𝑒𝑒 𝐶𝐶𝐶𝐶𝐶𝐶 𝐶𝐶𝐶𝐶𝐶𝐶
𝑡𝑡
𝑎𝑎51 52
53
𝑡𝑡 0 𝑎𝑎 0
54 1 21 152 ] [𝑎𝑎1
53
54 021 𝜀𝜀 𝑎𝑎
1
𝐷𝐷𝐷𝐷 ]𝑡𝑡0[0]1𝜀𝜀𝑡𝑡 𝐷𝐷𝐷𝐷
𝜀𝜀53
54 𝜀𝜀54
𝑎𝑎
1 ]𝑡𝑡0[0]0𝜀𝜀𝑡𝑡 𝐷𝐷𝐷𝐷
1 𝜀𝜀]𝑡𝑡0[ ]0𝜀𝜀𝑡𝑡 𝐷𝐷𝐷𝐷𝜀𝜀 𝑡𝑡 0]𝑡𝑡 𝜀𝜀 𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡
𝐶𝐶𝐶𝐶𝐶𝐶
have a long-run 0 0𝑡𝑡relationship 0 𝑡𝑡 𝜀𝜀 𝑀𝑀𝑀𝑀with household integrated of order two I (2) hence the
𝑀𝑀𝑡𝑡𝑎𝑎132= 𝑎𝑎
031 0𝑎𝑎1032 31 𝜀𝜀 0 𝑎𝑎1
𝑀𝑀𝑀𝑀 032𝑡𝑡 𝜀𝜀 𝑀𝑀𝑀𝑀 001𝑡𝑡 𝜀𝜀 𝑀𝑀𝑀𝑀 𝑀𝑀𝑀𝑀
𝜀𝜀growth. 𝑡𝑡
debt and economic This will be done next step is to proceed with the three ARDL
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑎𝑎𝑡𝑡1 42
41
43 𝑎𝑎0𝑎𝑎142
4341 𝜀𝜀 𝑎𝑎143
𝑎𝑎
0
𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅 0
42𝑡𝑡𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅 𝑎𝑎1 43 0
𝑡𝑡𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅 1 0
𝑡𝑡𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅 𝑡𝑡 𝜀𝜀 𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅𝑡𝑡
𝐷𝐷𝐷𝐷[𝑡𝑡𝑎𝑎51
Where [𝑎𝑎1𝑎𝑎52 theby
]51 left
𝑎𝑎53
𝑎𝑎 ]52 hand
estimating
𝑎𝑎𝑎𝑎54
]53 side theof
𝑎𝑎]54
Wald the ]𝑡𝑡 []equation
or F-test forcontains the joint a estimation procedures. The first step which
ide
quation
and ]
52
53
54
theofequation
side 53
54
thecontains [ 𝜀𝜀
ofequation 1
𝐷𝐷𝐷𝐷 54𝑡𝑡[ ]𝜀𝜀 𝐷𝐷𝐷𝐷
thecontains
significance equation 1
a contains𝑡𝑡[ ]𝜀𝜀 𝐷𝐷𝐷𝐷1
a contains
of the𝑡𝑡[ ]𝜀𝜀 𝐷𝐷𝐷𝐷
a 1
coefficients 𝜀𝜀
a
𝐷𝐷𝐷𝐷𝑡𝑡 ]
of the lagged involves the test for long run cointegration is
vector of residuals in
variables at their levels and comparing the reduced form, and on the
it presented in Table 1. In the ARDL model, the
educed
d
als the form,
inreduced
the form,
and reduced on form,
and the on form,
and the on and the on the
to the critical bounds values computed by existence of long run cointegration among
right hand side is the squared matrix (A0) of
d
eequared
the
tdhe ofequation
hand
side
isthe
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squaredequation
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Pesaran the
matrix contains
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etathe
matrix contains
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al.
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(2001). contains
of a of contains a a the variables for equations 4 and 5 are
coefficients associated with lagged variables and tested using the bounds F-test which checks
of
duals
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in
h residuals
ociated
ged
d reduced
the
withform,
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andand
null the
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on form,
and
hypothesis
and theon
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(Ho) on
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non-existence of the joint significance of the coefficients of
structural long-run shocks through the column vector (ɛ).
she ide
and
sred
umn squared
ugh the
throughis
columnmatrix
side
the squared
vector the
column matrix
is(ɛ).
the
vectorsquared
(A0)
the
column matrix
vector ofeffect
squared
(ɛ).(A0) matrix
vector
(ɛ). of(nomatrix
(A0) cointegration):
(A0)
(ɛ).of (A0) ofH0: 1= the lagged variables at their initial levels.
of
2= 3= 4= 5 is tested against the Accordingly, the F-statistic tests the null
The econometric alternate identification
hypothesis (H1) ofthat monetaryexist policy
with
of ents
agged
ssociated
ted
ntification
ction with
lagged
associated
variables
identification
monetary
of monetary with
lagged variables
oflong-run
policy
monetary lagged
with
of and variables
policy
monetary lagged
andvariables
policy and variables
policy and there and a hypothesis that: the coefficients of the
shocks is crucialeffect to any (existence model of cointegration
specification, lagged level variables are jointly equal
hral
odel cks
rough
olumn
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yoial modelshocks
anythrough
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to the
vector
specification, through
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any column
1:the
vector
(ɛ).
specification,
model column
1≠ vector
the(ɛ).
specification, column
2≠ vector
(ɛ).
specification, 3≠ vector
(ɛ). 4 ≠ (ɛ). 5. to zero (that is, there is no cointegration
including SVARs. The SVAR identification exercise or long-run relationship), which is tested
dentification
onometric
n tric
cation
ntification
R
s.SVAR of identification
monetary
identification
The of
SVAR monetary
identification
identification
exerciseof policy
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Should exercise of thepolicy
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exercise ofpolicy
F-statistics monetary
exercise policy exceed policy the upper against the alternative hypothesis that;
followed inbound this paper of the iscritical
explained as follows;
model
any
ducial
plained
paperisis
toas crucial
model
any
isto
explained
follows;asspecification,
model
any
explained
follows; to
specification,
as model
any
follows; asspecification,
model
follows; specification, specification,then we there exists a long run relationship between
values, I(1),
may reject the null hypothesis of no long the variables.
 The ordering of output and price level at the
ng ghe
output AR
Rs.
entification
price
and SVARs.
of SVAR
identification
The
output
price
level
and SVAR
identification
The runexercise
price
level
at
and SVAR
identification
the exercise
cointegration,
price
level
at identification
the exercise
level
at theat exercisethe exercise
concluding that the
beginning variables is because contained they react in thetomodels share Table 1: Bound Test for Cointegration
an innovation
explained
eyd ned
is
ct er in
because
seto paper
is this
as
react
they explained
follows;
paper
is
an innovation
to
react as
they explained
follows;
anmeaningful isas
innovation
to
react explained
follows;
an innovation
to an as follows;
long as
innovation follows;
run relationships. However, Bound Critical Values (unrestricted
in the monetary if the F-statistics policy rate are with inferior a lag to due
the to their
lower intercept with no trend) K=5
nd
put
fate
ary
thing
ordering
licyoutput
price
and
of
awith
policy
lag
ratedue outputprice
level
awithand
lagof
rate to output
due price
level
at
and
atheir
with
lagtodue the price
level
at
atheir and
lag the
todue level
price
at
their the
to their atlevel the at the
bounds of the critical values, I (0), we fail Models Estimated Critical Lower Upper
slow movement to reject in
the nature.
null hypothesis of no long F-Value Value Bound Bound
they
re. eact
nning
is
ause
ent because
nature. into
react
they
isanbecause
nature. innovation
to
react
they an innovation
to
react
they an innovation
to react an innovationto an innovation I(0) I(1)
run cointegration among the variables and
ywith
etary
policy
erate
monetary
awith
policy
lag
ratedue
awith
lag
policy
rate
todue
atheir
with
lag
concluderate
tothat
due
atheir
with
lagtodue
thetheir
avariables
lag
todue
theirto theirtested do
being Model (1) 10.235 1% 3.41 4.68
not share a significant long run relationship.
58 | P a g e 2.5% 2.96 4.18
wture.
ment
in
movement
nature.
in nature.
in nature.
58 | P a 58
g e| P a 58
g e| P a 58
g e| P a g e Model (2) 4.2380 5% 2.62 3.79
4.0 EMPIRICAL FINDINGS 10% 2.26 3.35
58
4.1| P aStationarity
58
g e| P a 58
g e| P aTest
58
g e| P a g58e| P a g e The bounds test results for long run
The stationarity test was done in order to cointegration are presented in Table 1. The
determine if each time series contains unit F-statistics in this case has been calculated
root or non-stationary and to determine the for two models in order to clearly explain
order of integration. This was necessary the relationship between household debt
to confirm the study’s validity in using and economic growth in Swaziland. Model 1
the ARDL Bounds testing methodology; in this regard is based on household debt as a
this methodology requires variables to be dependent variable while model 2 shows how
integrated of order I(0) or I(1) to make the household debt as an independent variable
model valid (Pesaran et el (2001). In this explains variations in economic growth.
study, the variables were first tested at levels
and were found to be none stationary. The Using Pesaran et al (2001) critical bounds
same test was conducted after differencing, value, the study finds that the estimated
and all the variables were found I(1). F-values for model 1 F(HD/GDP, CPI, BPA,
POP, PR) and model 2 F(GDP/HD,CPI, BPA,
4.2 Bounds Test POP, PR) is 10.24 and 4.24, respectively.
From the stationarity results it has been From the results we see that the estimated
established that none of the variables are F-values are greater than the upper bound

79
critical values at 1 and 5 per cent level The results further indicate that a 1%
of significance hence we reject the null increase in population is expected
hypothesis of no long run cointegration and to reduce household debt by 1.7 %.
conclude that there is long run cointegration Consequently, population growth was found
relationship between the variables specified to be contradicting theoretical expectations
in all the models and their dependent where it is expected to increase household
variables. debt. However, in this study, population
growth discourages growth in household
4.3 Long Run and Short Run Relationship debt and this could be due to the high
Analysis poverty and unemployment levels which
After generating a more parsimonious model hinders households from acquiring loans
which is traditionally found by gradually with commercial banks. Meng et al (2012)
deleting the insignificant variables. Table 2 purports that lower income or the absence
presents the long-run estimation results of of income due to high unemployment casts
the Model 1 based on the ARDL (1,3,0,2,1,1) doubt on future income. As a result, regular
lag length while Model 2 is based on ARDL unemployment of a household discourages
(1,1,2,0,1,2) lag length. The number of household debt because of concerns about
lags of both models were selected using the the ability to repay an existing loan hence
Akaike Information Criterion (AIC). From this discourages household demand for loans
the results of Model 1, the coefficients and constraints growth of household debt.
of Consumer Price Index, Building Plans
Approved and Population were found to be Even though the coefficients of GDP and prime
significant determinants of household debt. lending rates were found to be insignificant
The estimated coefficients (Model 1), determinants of household debt, they do
suggest that a 1 % increase in the Consumer bear the correct signs which are in line with
Price Index will result in a 0.70% increase theoretical expectations. The results as
in household debt in the long run implying presented in Table 2 imply that growth in
that as the cost of living rises they pose a GDP and lending rates discourage or retard
burden to household disposable income household borrowing. The signs of these
hence forcing households to acquire more parameters confirm the findings by Hong
loans. Khan et al (2016) further points out (2011), Khan et al (2011) and Cletta et al
that households may use debt to supplement (2014) who also found a negative relationship
their wages in order to meet their daily living between interest rates, GDP and household
expenses. debt in the respective countries.
On the other hand, a 1% increase in building The goodness of fit of Model 1 as shown
plans approved translates into a 0.23 % in by R-squared and Adjusted R-squared are
household debt. The positive coefficient of 0.75 and 0.61, respectively. These results
building plans approved could mean that imply that 61 per cent of total variation in
the desire for households to own urban household debt is explained by the specified
residential properties is facilitated through explanatory variables in the model, which is
the acquisition of mortgage which translates a fairly good fit.
into an increase in household debt.

Table 2: Estimated long run coefficients using Table 3: Error Correction Model
ARDL Model (1) Model (2)
Model (1) Selected ARDL Model (2) Selected ARDL Dependent Variable (LogHD) Dependent Variable
(1, 3, 0, 2, 1, 1) (1, 1, 2, 0, 1, 2) (LogGDP)
Dependent Variable Dependent Variable Explanatory Coefficient Explanatory Coefficient

(LogHD) (LogGDP) Variables Variables
Explanatory Coefficient Explanatory Coefficient Δ(LogGDP) -2.69936*** Δ(LogCPI) -0.699360*

Variables Variables Δ(LogGDP(-1)) -1.670036 Δ(LogBPA) 1.670036*
LogGDP(-1) -0.433943 LogCPI(-1) 1.196074* Δ(LogGDP(-2)) -1.899906 Δ(LogBPA(-1)) -0.587505*
LogCPI(-1) 0.704221*** LogBPA(-1) 0.417741** Δ(LogCPI) 0.587505*** Δ(LogHD) 0.042557*
LogBPA(-1) 0.234008* LogHD(-1) -0.968235** Δ(LogBPA) 0.042557*** Δ(LogPOP) 0.071250**
LogPOP(-1) -1.737674* LogPOP(-1) -1.678399*** Δ(LogBPA(-1)) -0.081417* Δ(PR) -0.172338*
PR(-1) -0.003505 PR(-1) -0.017081
Δ(LogPOP) -0.172338 Δ(PR(-1)) 0.019775*
C 29.811409 C 0.020199
Δ(PR) -0.019775*** ECM2(-1) -0.065668**
R-squared R-squared
ECM1(-1) -0.834261*
0.749528 0.669905
*, ** & *** denotes significance at 1%, 5% & 10% statistical level.
Adjusted R-squared Adjusted R-squared
0.607956 0.511459
S.E. of regression S.E. of regression 0.00381 Having established that there exists long run
0.024871 F-statistic
cointegration among the variables the next
F-statistic 4.227976
5.294348 Prob(F-statistic) step is to investigate the short run dynamic of
Prob(F-statistic) 0.001146 the two models through an error correction
0.000262
representation of the ARDL model. As shown
*, ** & *** denotes significance at 1%, 5% & 10% statistical level.
in Table 3, the speed of adjustment towards
In the case of Model 2, the coefficients of long run equilibrium for Model 1 is -0.83
the consumer price index, building plans which suggests that 83% of any deviations
approved and population were found to be towards long run equilibrium between
significant determinants of GDP at 1%, 5% household debt and its determining factors
and 10%, respectively. Compared to model is corrected within one quarter. Denoted as
1, model 2 results reveal that there exists ECM1, it is also interesting to note that the
a negative and significant relationship coefficient of the error correction term is
between household debt and economic quite high suggesting that restoration to a
growth in the long run in Swaziland. This steady state level is much faster, should the
result is consistent with existing empirical model be confronted with any disturbances.
findings of Kim (2016) who found that debt
accumulation depresses economic growth in From the findings presented in Table 3, it is
the long run. Verner et al (2015) also found also evident that the results do not concur
that rising household debt was associated with the long run results of household debt
with a decline in GDP growth. determinants shown in Table 2. Contrary to
the long run, the short run impact of GDP
The estimated coefficients further show that on household debt was found to be negative
a 1% increase in the consumer price index and statistically significant at 10 per cent
and in building plans approved will result level. This therefore suggests that economic
in 1.2 per cent and 0.42% increase in GDP growth in the long run is not a significant
respectively. Also, a 1% increase in household determinant of household debt in Swaziland.
debt and population rates individually, will
result in a decrease of 0.97 %, 1.68 % and 0., Table 3 also shows that a 1% increase in prime
respectively. lending rates in the same quarter decreases

81
household debt by 0.02%. This result is found appropriate, several diagnostic tests were
to be consistent with the long run result conducted, these include, tests for serial
which found that there exists a negative but correlation and homoscedasticity. The
insignificant relationship between the two Ramsey RESET test for model specification
variables. The main reason for this is that was also conducted to check whether the
interest rate hikes in general discourage models non-linear combinations of the fitted
loan demand because it raises the cost of values help explain the dependent variable
borrowing, which discourages household or not.
from borrowing or at least reduce credit
demand. Table 4: Summary of Diagnostic Tests
Diagnostic Model 1(HD) Model 2(GDP)
On the other hand, a 1% increase in the Tests
consumer price index and building plans Test p-value Test p-value
Statistic Statistic
approved in the immediate short run results
Jarque-Bera 0.6045 0.7391 1.5311 0.4651
in household debt increasing by a 0.59 and (normality)
0.04%, respectively, indicating that these Breusch- 1.3316 0.5139 2.2391 0.3264
variables have a positive impact in short run Godfrey (serial
as well. However, this paper takes exception correlation)
that once a quarter elapses, building plan Breusch- 6.2471 0.9367 7.5185 0.8215
Pagan-
approved begin to generate a negative Godfrey
impact leading to a 0.08% reduction in (hetero-
household debt. scedasticity)
Ramsey RESET 0.3681 0.7163 0.1609 0.8735

In terms of Model 2, the analysis also provides
a contrasting picture to what was found Table 4 presents the diagnostic test
in the long run results. According to the results which indicate that all the models
results,there exists a positive and significant do not suffer from problems of serial
short run relationship between household correlation, heteroscedasticity and
debt and economic growth. Specifically, the model misspecification as shown by the
result indicates that a one per cent increase insignificance of the probability values of
household debt results in 0.04 % increase in the Jarque-Bera, Breusch-Godfrey, Breusch-
economic growth in Swaziland. Pagan-Godfrey and Ramsey RESET tests.
The error correction term also reflects the 4.5 Parameter Stability Test
required negative sign which is statistically In order to confirm the stability of the
significant. Thus, it can be concluded that estimated coefficients given that the model
any short run deviations are highly likely is said to be correctly specified, Pesaran
to converge towards long run equilibrium. (1997) proposed that the cumulative sum of
The coefficient of the error correction term recursive residuals (CUSUM) and the CUSUM
(ecm2) is -0.066 which implies that about of squares tests be applied to assess the
6.6% of disequilibrium between GDP and stability of the estimated parameters. As a
its determining factors is corrected within result, the plots of the cumulative sums are
one quarter. This shows a very slow speed expected to fall within the 5% critical lines
of adjustment towards long run equilibrium. of statistical significance where we shall
conclude that the coefficients are stable and
4.4 Diagnostic tests reliable.
To ensure that the results are robust and

0.2
0.0
0.0
C E N T R A L B A N K O F S WA Z I L A N D | RESEARCH BULLETIN VOLUME 2 -0.2
-0.2
Figure
Figure 4. 4. Stability
Stability test test results-
results-Model Model1 1 -0.4
-0.4
IV I II
Figure 4. Stability test results - Model 1 Figure 5: Stability test results - Model 2
(LogHD)
(LogHD)
(LogHD)
5% critical lines of statistical significance where
(LogGDP) Research Bulletin Volume 2
1.4 15
2009 20
1.2
we shall conclude that the coefficients are stable 1.0

10
1515
and reliable. 0.8 5
0.6
0.4
0 FiguF
1010 0.2 -5
0.0
-10
CUSU
C
-0.2
55
Figure 4. Stability test results- Model 1
from
-0.4 -15
(LogHD)
IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2009 2010 2011 2012 2013 2014 2015
IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2009 2010 2011 2012 2013 2014 2015 fr
0
0 CUSUM of Squares 5% Significance CUSUM 5% Significance
15
Figure 4 and 5 reflect the plots of CUSUM and stabs
-5 10
-5 Figure
CUSUMQ 4 and
tests5ofreflect
the twothe plotsThe
models. of CUSUM
results
5
and
fromCUSUMQ
the two tests
figuresofreflect
the two models. and
the reliability The resid
r
-10 0 results from the two figures reflect the
-10 -5 stability of all the estimated parameters as all the
reliability and stability of all the estimated
critic
-15-10
residuals were
parameters
tocritical
be falling
as allfound
within
thetoresiduals
be fallingwere
withinfound
the
c
-15-15 II III IV I II III IV I II III IV I II III IV I II III IV I II III IV bounds of 5% the
levelcritical bounds of 5%
of significance.
II2010 III IV I 2011 II III IV I 2012 II III IV I 2013
II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
II III IV I2014II III IV 2015
I II III IV level of significance.
2010 2011 2012 2013 2014 2015
5. Conclusions and Recommendations

2010 2011 5% Significance 2012
CUSUM
CUSUM
2013 2014
5% Significance
2015
5.0 CONCLUSIONS AND 5. C
1.4
1.2
CUSUM 5% Significance
ThisRECOMMENDATIONS
paper investigates the relationship between 5
1.41.0 This paper debt
household investigates the relationship
and economic growth in
1.40.8
1.20.6
between household debt and
Swaziland by employing the Autoregressiveeconomic This
1.2
0.4
growth in Swaziland by employing the
Distributed Lag modelling approach using T
1.0 0.2
Autoregressive Distributed Lag modelling
quarterly using
approach data from 2006 todata
quarterly 2015.from
Using 2006
the
hous
h
0.0
1.0
0.8-0.2 tobounds
2015. test
Using the bounds
for long-run test for the
cointegration, long-run
study
0.8
0.6
-0.4
cointegration, the study found evidence
found evidence of a long run relationship
of Swa
2010 2011 2012 2013 2014 2015 a long run relationship between household
between
andhousehold credit and economic growth. S
0.6
0.4 CUSUM of Squares 5% Significance
credit economic growth.
Distr
The results revealed that household credit had a
0.2Figure 5: Stability test results -Model 2
0.4
(LogGDP)
The results revealed that household credit
long-run negative and andsignificant impact on quar
D
0.0 had a long-run negative significant impact
0.2
oneconomic
economic growth,
growth, while thewhile the growth
economic economic had
-0.2
0.0 growth had an insignificant negative
an insignificant negative impact on household impact q
boun
on household credit in Swaziland. Such
-0.4 credit in Swaziland. Such findings imply that an
-0.2
findings imply that an increase in household
increase
debt in long
in the household debt ineconomic
run deters the long rungrowth.
deters b
foun
-0.4 2010 2011 2012 2013 2014 2015 More importantly,
economic this importantly,
growth. More finding is in line
this with
finding
CUSUM of Squares 5% Significance
the earlier assertion that excessive growth
is in line with the earlier assertion that excessive fo
betw
2010 2011 2012 2013 2014 2015 in household debt, if left unchecked, may
growth in household debt, if left unchecked, may
bring a negative effect on the performance
Central Bank ofCUSUM of Squares© 2018
5% Significance of the economy (Hammad et al, 2016). 94 | This
b
The
Swaziland
Figure 5: Stability test results -Model 2
Page calls for close monitoring of the household
(LogGDP)5: Stability test results -Model 2 longT

Figure Central Bank Of Swaziland © 2018
83
econ
credit market and the control of excessive The consumer price index was found to
households’ exposure to credit. This can lead to an increase in household debt.
be achieved by setting a household credit This finding of the study implies that an
threshold that promotes economic growth. increase in consumer prices encourages an
The study further explored the impact of increase in household debt in Swaziland. As
prime lending rate, population growth, prices go up, households are expected to
residential building plans approved and increase their credit in order to smoothen
consumer price index on household credit their consumption. Though the central bank
and economic growth. The study established expertly controls the interest rates when
that the consumer price index, population inflation increases, the households will have
growth and the residential building plan more loans to maintain and defaulting risks
approved had significant influence on will also increase. Dercon (2012) explains
household credit in the long run. that in most cases, households in developing
countries often lack risk management tools
Based on the aforementioned, the findings to meet adverse shocks. Thus encouraging
of this study indicated that an increase in financial literacy among consumers would
residential building plans approved leads to help households to manage their spending
an increase in household credit in the long pattern and help them make informed
run. This implies that the housing market decisions.
plays a significant role in the accumulation
of household credit in Swaziland which is a The ECMs for both models were found to be
cause for concern. In this regard, government statistically significant with the expected
needs to intervene and impose polices signs. In the case of the household debt
that require further scrutiny of the credit model, the estimated value was 0.83
extended towards residential development. implying that approximately 83 per cent
of disequilibria in the long run is corrected
Furthermore, the study revealed that an within one quarter while in the case of the
increase in population leads to a decrease GDP model the ECM implies that 6.6 per cent
in household debt in Swaziland in the long of disequilibrium is corrected within one
run. This finding implies it is possible for quarter.
household debt to fall as a result of an
increase in population. Aligned with this 5.1 Recommendations for further research
negative relationship could be the high For future research, we recommend that
level of unemployment and poverty which further studies be conducted to determine
shows that a number of households could be the household credit threshold that sustains
unbanked and highly incapable of acquiring economic growth in Swaziland. This would
loans with commercial banks. According to help policymakers to make informed policy
Zimunya and Raboloko (2015), it is possible decisions. Though the study found a long run
to reduce household debt by creating more relationship between household debt and
jobs. This study thus reiterates the need economic growth, the causal relationship
for more job creation opportunities in both has not been explained in this study hence
private and public sectors which would the granger causality is recommended for
increase productivity in the economy and further research.
enhance household income hence raising
households’ ability to acquire credit.

REFERENCES Kilman J. (2016). Government, Household

and Corporate Debt-The Effect on
Bank of Canada Review (2012), Household Growth. Lund University, School of
Spending and Debt, Bankgrounders. Economics and Management. http://
lup.lub.lu.se/student-papers/
Central Bank of Swaziland (2015/16), record/859794.
Annual Report.
Kim Y.K (2016), Macroeconomic effects of
Central Statistics Office (2015), National household debt: an empirical analysis.
Accounts Report. Review of Keynesian Economics,
Volume 4 No. 2, Summer 2016, pp 127-
Coletta M., De Bonis R., Piermattei S., 150.
(2014), The determinants of household
debt: a cross-country analysis, Temi di Mah G., Petersen M., Makududdem-Petersen
Discussione Working Papers, No. 989. J., Meniago C. (2013). Shocks and
Household Debt in South Africa: A
Essays, UK. (2013). Link Between Household variance Decomposition and GIRF
Debt And Savings Economics Essay. Analysis. Mediterranean Journal of
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ukessays.com/essays/economics/link-
between-household-debt-and-savings- Martinez-Carrascal, C. & Del Rio, A. (2004).
economics-essay.php?cref=1. Household Borrowing and Consumption
in Spain: A VECM Approach.
Gujarati, C.W & Porter, D.C (2009). Basic Documentos de Trabajo No. 0421.
Econometrics. 5th edition, McGraw Banco de Espana.
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Meng S., Hoang N.T., Siriwardana M. (2011).
Hammad H., Khan A., Hussin A, Shamzaeffa The Determinants of Australian
S. (2016). The Linkages between Household Debt: A Macro-level Study.
Household Consumption and Business, Economics and Public Policy
Household Debt Composition in Working Papers, 2011-4.
Malaysia. International Journal of
Economics and Financial Issues, 2016, Mutezo, A. (2014). Household debt and
6(4), 1354-1359. consumption spending in South Africa:
an ARDL-bounds testing Approach.
Hong Z. (2011). Exploring Determinants Banks and Bank System, Volume 9,
of U.S household Debt. Journal of Issue 4:73-81.
Applied Business Research, 27(6), 85-
91. Panic´ S. (2010), Household debt in
Sweden; an empirical investigation of
Khan, H. H. A., Abdullah, H. & Samsudin, the determinants of the debt increase
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of Malaysian Household Debt.
International Journal of Economics Pesaran, H.M., Shin, Y. & Smith, R (2001).
and Financial Issues, 2016, 6(4), 1468- Bounds Testing Approaches to the
1473. Analysis of Level Relationships.
Journal of Applied Econometrics
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Prinsloo, J.W. (2002). Household debt, Tudela and Young (2005), The Determinants
wealth and saving. Quarterly Bulletin, of Household debt and Balance Sheets
SA Reserve Bank: 63-78. in the United Kingdom. Bank of
England wp 266.
Rahman S. and Masih M. (2014). Increasing
Household debt and its Relation TO Verner E., Sufi A. and Mian A. (2015).
gdp, Interest rate and house price: Household Debt and Business CCycles
Malaysia’s perspective. MPRA Paper Worldwide. wp 21581. http//:www.
No. 62365. nber.org/paper/w21581.
Santos C.S., Costa V., Teles N (2014). The Wildauer F.(2016). 7 Facts about U.S.
Political Economy of Consumption and Household Debt. https://www.
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Weinberg J. A. (2006), Borrowing by U.S
Shim I., Mohnty M., Lombandi M. (2017), Households. Federal Reserve Bank of
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Determinants of Household Debt
in Botswana: 1994-2012. Journal
of Economics and Public Finance,
1(1),14-36.

Modelling and Forecasting Inflation 1.0 INTRODUCTION

Dynamics in Swaziland The importance of a clear understanding of
the determinants of inflation is undisputed
Bongani P. Dlamini14 given its role in economic policy, and yet
there are a plethora of theories regarding
Abstract its determination. Hence, there is an
obvious role for model selection techniques
The purpose of this study was to identify in ascertaining the most relevant causes
a suitable inflation forecasting model ideal of inflation. Like many Central Banks, the
for small economies like Swaziland, eight Central Bank of Swaziland has the ultimate
quarters ahead. This was to be attained goal of attaining price stability, stable and
through evaluating the Vector Error sound financial systems that will ensure
Correction Model (VECM), the Bayesian sustainable economic growth. This can
Vector Autoregressive (BVAR), two variants be achieved through a sound monetary
of the phillips curve model (ARDL & Triangle policy formulated and implemented by the
model) and two types of naïve benchmarks Central Bank. This can be done by basically
(Autoregressive Moving Average (ARMA)) influencing the monetary variables to achieve
and the random-walk model proposed by the ultimate macroeconomic goals of the
Atkeson-Ohanian (2001) using quarterly nation, particularly low inflation. However,
data between 1990Q1 and 2013Q4 for Swaziland’s inflation has experienced many
parameter estimation and 2014Q1 to 2015Q4 structural breaks and regime changes over
for forecasting. The quality of the obtained the past years. The key determinants of
forecasts was evaluated using four classical inflation are the pressures arising from excess
statistical loss functions: Mean Absolute demands in all sectors of the economy and so
Error (MAE), Mean Absolute Percent Error measures of excess demand for both goods
(MAPE), the Root Mean Squared Error (RMSE), and labour are crucial, with the output gap,
and the Thiel’s Coefficient. Results show as a proxy for excess demand for goods and
that the AO model proved to be the best services, being widely used.
model both in-sample and out-of-sample.
Generally, all the models failed to beat In general terms, monetary policy can be
the AO naïve benchmark, even combined defined as the manipulation of monetary
models. The BVAR was the only model which variables such as money supply, interest
challenged the AO, hence can be ideal for rates, and credit availability, to achieve the
forecasting inflation in Swaziland. ultimate national macroeconomic objectives
of price stability, low unemployment,
Key words: Inflation, forecasting models, stable exchange rate, and economic growth
forecast evaluation, forecast combination, (Dlamini, 2014). Faure (2005) defines
Swaziland. monetary policy as the formulation and
execution of policies by the central bank,
in the form of open market operations to
render repo rate effective. It is aimed at
guiding bank lending rates to levels where
credit and money demand are at a level
with aggregate supply elasticity, all of
Bongani P. Dlamini is an Senior Economist, Policy
14 which are premeditated on the attainment
Research, in the Policy Research and Macroeconomic of low inflation (usually targeted) and high
Analysis at the Central Bank of Swaziland.,reachable and sustainable economic output. However,
at Bonganid@Centralbank.org.sz.

87
central banks define monetary policy in for Swaziland. As noted by Langa (2001),
various ways. In practice there are many Swaziland’s monetary policy framework is
instruments which can be used by the to a greater extent influenced (determined)
central banks in formulating their monetary by her membership to the quasi-currency
policies. They include controlling the level board, the Common Monetary Area (CMA),
of money supply, the reserve and liquidity where South Africa is a dominant member.
requirements, open market operations,
and the discount rate among others. The 1.1 Monetary Policy in Swaziland
discount or bank rate is the most popular The Central Bank of Swaziland has at
in most central banks. These banks target its disposal a variety of monetary policy
a certain level of inflation which guides instruments to achieve price stability.
them whether to increase or decrease However the country’s membership to a CMA
the discount rate. Central banks in most coupled with full economic integration and a
advanced economies now operate with some fixed exchange regime precludes discretional
form of either explicit or implicit inflation monetary policy or independence. Therefore
target. However, several emerging markets Swaziland has no formal role in the
and developing economies have adopted formulation of the monetary and exchange
inflation targeting since the 1990s, including rate policies. Therefore given the parity of
South Africa in 2000. the currency of Swaziland to the Rand and
the free mobility of capital, the scope of
Therefore, understanding the dynamics of monetary policies in Swaziland is limited and
inflation is very crucial in predicting the less independent to those of South Africa. The
future course of inflation in a precise manner exchange rate peg has to be fully supported
to achieve the goal of price stability. A number by well-coordinated monetary policy and
of efforts have been undertaken in different discipline fiscal policies. Expansionary fiscal
countries to identify suitable models for policy in Swaziland tends to undermine the
this analysis and has resulted into a large exchange rate peg by exerting pressure on
number of different models for inflation, external outflows reducing reserves and
which vary in terms of scale, and in terms threatening the peg, (Nxumalo, 2014).
of the variables assumed to drive Inflation.
According to Aron and Muellbauer (2011), In that regard, keeping the exchange rate
forecasting inflation in emerging markets is peg serves as an intermediate goal for
particularly challenging compared to the US monetary policy in Swaziland. To support this
and the Eurozone, due to the volatility in food exchange rate policy of the currency board,
prices, exchange rates, as well as structural Swaziland has to keep high levels of reserves
changes, hence a range of approaches are equivalent to the conventional international
used for forecasting inflation. These efforts standard of 3 months of imports cover.
have resulted in a large number of different
models for inflation, which vary in terms of Generally, Swaziland’s discount rate moves
scale, and in terms of the variables assumed in tandem to that of South Africa, however
to drive inflation (including the output gap, based on domestic economic fundamentals,
unemployment rate or unit labour costs). Swaziland sometimes deviate from the
This paper therefore seeks to identify a South African Reserve Bank (SARB) repo rate
suitable model for forecasting inflation usually by 50 basis points.

domestic economic fundamentals, Swaziland effect from South Africa to Swaziland since 1.4
dominant
sometimes deviate from the South African Swaziland sources more than 90 percent of its We
ReserveC E NBank
T R A L(SARB)
BANK Orepo
F S Wrate
A Z I Lusually
AND R E S E Aimports
|by 50 R C H B U L via
L E T ISouth Africa.
N VOLU M E 2 In the long-run the
The
basis points. relative purchasing power parity hypothesis
(wh
ts disposal holds for these countries’ price movements. More
Figure 1: Swaziland and South Africa Discount has
uments to Figure
Rates 1: Swaziland and South Africa Discount parity
than 70 hypothesis
percent of holds for these
the inflation countries’
movements in
Rates price movements. More than 70 percent by
country’s 16 Swaziland are explained by exogenous factors
of the inflation movements in Swaziland sur
economic 14
12 are explained
mainly by exogenous
through imported inflationfactors mainly
(Nxumalo and
through2013).
imported inflation (Nxumalo and sur
e regime 10 Mabuza,
8 Mabuza, 2013). we
Per cent
policy or 6
no formal 4 Figure 2: Swaziland and South Africa inflation con
2 Figure 2: Swaziland and South Africa inflation
rates
etary and 0 rates 200
22.0
2000
2002
2004
2006
2008
2010
2012
2014
2016
the parity 20.0 Exp
18.0
nd and the SD Discount Rate SA RepoRate 16.0 bre
14.0
per cent
monetary
Source: Central
Source: CentralBank of Swaziland
Bank of Swaziland 12.0 inte
10.0
and less 1.2 Theoretical Framework on Inflation 8.0 (cla
1.2 Theoretical Framework on Inflation
Dynamics 6.0
4.0
rica. The Dynamics 2.0 pur
Different schools of thought articulate to 0.0
ported by Different schools of thought articulate to the
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
dynamics ofof
dynamics inflation trends
inflation especially
trends in relationin
especially
discipline SD Inflation SA Inflation bas
relation
to economic togrowth.
economic
Centralgrowth.
to inflationCentral
dynamicsto
Source: Central Bank of Swaziland & STATS SA SA
policy in inflation dynamics is the issue of neutrality Source: Central Bank of Swaziland & STATS
is the issue of neutrality of money and labour
hange rate of money and labour markets adjustment
markets
to price adjustment
changes. The to traditional
price changes. route Theto Inflation trends for Swaziland and that of
l outflows her major trading partner, South Africa,
analyzing
traditional inflation is that ofinflation
route to analyzing isolatingisdemand
that of Central Bank of Swaziland © 2018
the peg, pull pressures and pressures
cost push Pin
a g Figure 2 depict that between 1989 and
and pressures.
e
isolating demand pull cost push 1994 the two countries’ inflation rates
According to the Keynesian model, demand
pressures.
pull According
inflation arises tofrom
the factors
Keynesian thatmodel,
lead averaged above 10 per cent, with South
to excess
demand demandarises
pull inflation in from
an factors
economy (i.e.
that lead Africa’s inflation rates higher than those
rate peg
increased in investment, in Swaziland. Between 1994 to 2000 South
monetary to excess demand in an economy rise in money
(i.e. increased in Africa’s inflation decreased at a faster pace
supply or government financing spending
hange rate investment,borrowing).
through rise in moneyCost supplypush
or government
inflation, than that of Swaziland; After adopting the
on the other
financing hand,through
spending links inflation
borrowing).to supply
Cost inflation targeting regime in 2001, South
nd has to
factors – predominantly rising production Africa’s inflation continued to slow down at
costs. Structuralists believe that structural 99 | a faster pace than that of Swaziland. The
bottlenecks such as distortionary government country’s inflation has remained higher than
policies, government budget constraint, the inflation rate of South Africa for the
inelastic supply of essential commodities better part of the last ten years.
and conflicts in income distribution are key
determinants towards inflation outcomes. 1.4 Swaziland Inflation Composition and
Weights
1.3 Swaziland and South Africa Inflation The composition of the consumer prices index
Trends (whose changes are used to measure inflation)
Inflation movements in Swaziland are often has changed over time predominately
linked with those of South Africa with the informed by household and income and
notion that there is high imported-inflation expenditure surveys (HIES) carried out in
pass-through effect from South Africa to the country. These surveys provide data for
Swaziland since Swaziland sources more than evaluation of the weighting structure of the
90 percent of its imports via South Africa. In items in the consumption basket. The latest
the long-run the relative purchasing power survey used is the 2001 Swaziland Household

89
Income and Expenditure surveys (SHIES Table 1: A Comparison of Old and the New CPI
2001). The breakdown of the subcomponents Weights
is based on the international classification Code COICOP Weight Weight Perc- %
Category Based Based entage change
standard COICOP (classification of Individual Classification on on point
consumption by purpose). Given the high SHIES SHIES change
2001 2010
poverty rates noted in the SHIES 2001 , food
dominates the consumption basket. Research Bulletin 01 Food &
Volume 2
non-alcoholic
37.73 28.31 -9.4 -25.0
beverages
Figure 3: Comparative Inflation Rate Trends
Figure 3: Comparative Inflation Rate Trends 02 Alcoholic 0.96 0.41 -0.6 -57.3
20.0 beverages &
18.0 tobacco
16.0
14.0 03 Clothing & 6.16 3.76 -2.4 -39.0
12.0
per cent
10.0 footwear
8.0
6.0 04 Housing & 14.33 29.24 14.9 104.1
4.0 Utilities
2.0
0.0 05 Furnishing 11.88 5.08 -6.8 -57.2
-2.0
Sep-15
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-16
Sep-17
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
-4.0 & household

equipment
Food Transport 06 Health 3.58 3.46 -0.1 -3.4
Other Overall Inflation Table

07 1: A Comparison8.6
Transport of Old9.95
and the
1.4New15.7
CPI
Source:Swaziland
Source: Swaziland Central
Central Statistics
Statistics Office Office 08 Communications
Weights 1.43 3.17 1.7 121.7
09 Recreation & 4.62 1.17 -3.5 74.7
COICOP
culture Weigh Weight Percenta %
CPI Weights
CPI Weightsmay
maybecome
become
out out of date
of date and
and less
Co Category t Based 8.77ge point change
less representative
representative of consumption
of current current consumption
patterns.
10 Education 5.38 3.4 63.0
patterns. This inaccuracy increases the de Classification

11 Based 0.72
Restaurants & on 1.91change1.2 165.3
This inaccuracy
further increases
the length thefrom
of time further
thethe length
reference
hotels
on SHIES
12 Miscellaneous 4.67 4.78 0.1 2.4
period.
of At some
time from point, itperiod.
the reference becomes necessary
At some point, SHIES 2010
goods & services
tobecomes
it use thenecessary
weightstoofuse
a the
more recent
weights of aperiod
more All Items
2001 100 100
to ensure that the index is weighting 01 Source:
FoodSHIES
& non- 37.73
2000/1 and 28.31 Central
SHIES 2009/10, -9.4 Statistics
-25.0
Office
recent period to
appropriately theensure
price that the index
changes is
currently alcoholic
faced by appropriately
weighting consumers. the The price
recommended
changes
The results from SHIES 2010 indicate
beverages
frequency
currently forbyupdating
faced consumers. CPIThe
weights is once
that
recommended there has 0.96
been a0.41 notable shift -57.3
in the
02 Alcoholic -0.6
in every 5 years. However, the frequency of consumption patterns between the two
frequency for updating
updating weights CPI weights
depends is once in
beverages &
on the availability
survey periods. The major change in the
of household
every income and
5 years. However, the frequency tobacco
expenditure of
SHIES 2001 is the share (weight) of ‘food and
surveys weights
updating (HIES) as they on
depends always provide not
03 Clothing
non-alcoholic
the availability of
& 6.16
beverages’3.76 -2.4
component -39.0
which
only a snapshot of the levels of income footwear
fell by 9.4 percentage points from 37.73
household
and expenditureincome for and households
expenditure during
surveys a
04 percent
Housing in &the14.33 current
29.24 weights
14.9 to 104.1
28.31
specified
(HIES) reference
as they period,
always provide notbut
onlyalso provide
a snapshot
percent
Utilities in the new weights. The share of the
a comparative
of the levels ofanalysis
income toandsubsequent
expendituresurveys
05 ‘housing
for
Furnishing and& utilities’
11.88 component
5.08 -6.8 increased
-57.2
on changes in household consumption byhousehold
14.9 percentage points to a share (weight)
households
patterns and during a specified
income referenceThe
distribution. period,
last
of equipment
29.2 percent, replacing ‘food and non-
update
but also ofprovide
CPI weights in Swaziland
a comparative wastoin
analysis
alcoholic beverages’ as the component
April 2007 based on the SHIES 2001.06 Health
Another 3.58 3.46 -0.1 -3.4
subsequent surveys on changes in household with the largest weight in the consumption
SHIES was conducted in 2010 and based on 07 Transport
basket. Another 8.6 9.95
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inflationwhich were had
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of unemployment or output,
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unemployment and higher inflation (Norman and
102 |
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Distributed 𝑡𝑡−1 Lag (ADL) 𝑡𝑡 Phillips 𝑡𝑡 Curve
traditional the new (1998) improved an th
traditional and the new Phillips on curve
the of the form:
inflation rate π conveys inertia. D is an VECM
(1999)
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𝑡𝑡 ) + 𝜇𝜇𝜋𝜋𝑡𝑡−1was
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NKPC. −They𝑈𝑈 𝑡𝑡 ) +added𝜇𝜇𝜋𝜋both
of 𝑡𝑡−1 + the 𝜀𝜀𝑡𝑡 triangle
the past model without the supply shock variables
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not have put to better an
serially uncorrelated
The major difference in this hybrid NKPC it any better when they stated that inflation error term. Stock and
of, interest rates, the Alture
furthermajor
term 𝜋𝜋 𝜇𝜇𝜋𝜋
is =used
the
𝑡𝑡 𝑡𝑡−1 ,difference
𝛼𝛼𝐸𝐸 real+ unit
𝑡𝑡 𝜋𝜋𝑡𝑡+1 are
which
addition (in
𝛽𝛽of labor
this
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the − 𝑈𝑈term
lagged 𝑡𝑡 )
cost
∗ hybrid
+
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𝜇𝜇𝜋𝜋𝑡𝑡−1 +,(2008)
𝜀𝜀which
𝑡𝑡
than
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thepresented 𝜋𝜋 𝑡𝑡 = 𝑎𝑎(𝐿𝐿)𝜋𝜋
the
has become both harder and easier to The𝑡𝑡−1 + 𝑏𝑏(𝐿𝐿)𝐷𝐷
Auto- 𝑡𝑡 + 𝜖𝜖 𝑡𝑡
are theof lagged
addition the proxy term values 𝜇𝜇𝜋𝜋𝑡𝑡−1 of, which
current areinflation.
thecost. laggedThe forecast. They state that it’s easiergap in the model.and
because The
output
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Furthermore
to
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PhillipsNKPC curve istoas theas the in the
the version
was of the1970’s
Gordonand the (1982) root mean squared
between
must be the restriction 103 the and
that expected inflation error (RMSE) of naïve inflation about
forecasts forecasting the
| 𝛼𝛼 + 𝜇𝜇 = 0 to rule Pout
triangle model without a g e the supply shock variables
hybrid
additionNKPC, of the as
variables. term it 𝜇𝜇𝜋𝜋
displays
𝑡𝑡−1 , which features
are the lagged of both has the declined. They further state that it is
103 | with relatively small e
and presented it as: hard to forecast due to less improvement in
values
traditional of
2.1.4 and current
The triangle inflation.
the newModel Furthermore
Phillips curve of the form: there
percentage terms of standard multivariate
According to the
must be the restriction that 𝛼𝛼 + 𝜇𝜇 = 0 to rule new Keynesian theories, out forecasting models over Alturki and Vtyurina
univariate
one of the drawbacks of∗ the standard benchmarks, hence it has become much 𝜋𝜋 𝑡𝑡 = 𝑎𝑎(𝐿𝐿)𝜋𝜋 𝑡𝑡−1 + 𝑏𝑏(𝐿𝐿)𝐷𝐷 𝑡𝑡 + 𝜖𝜖 𝑡𝑡 ,
= 𝛼𝛼𝐸𝐸𝑡𝑡curve
𝜋𝜋𝑡𝑡Phillips 𝜋𝜋𝑡𝑡+1 + 𝛽𝛽 (𝑈𝑈𝑡𝑡 − 𝑈𝑈 𝑡𝑡 )as+the
was identified 103 |+ 𝜀𝜀𝑡𝑡
𝜇𝜇𝜋𝜋failure
𝑡𝑡−1 and long term dynami
difficult for inflation forecasters to provide
to explain the behavior ofwhere inflation all the in some variables value are as addedexplained beyond before.a univariateTajikistan model. using the
eras. In light
Where the variables are as explained of this dilemma, Gordon (1982)
Central Bank before. of Swaziland The
Although
© 2018 this assertion was based on the
developed the empiricalP atriangle ge
model. US data, it is quite true to the rest of the
major That difference
was after in the this hybrid NKPC
US experienced the firstis world. the It is for that reason that forecasters
oil shock between 1973-1975 which caused have persistently tried different models in
addition inflationof the andterm 𝜇𝜇𝜋𝜋𝑡𝑡−1 , which
unemployment to be are positively the lagged forecasting inflation, deriving mixed results.
correlated. This model was in reference to
valuestheofthree current inflation. Furthermore
basic determinants of the inflation there Several authors have tried different
rate: inertia, demand, and supply. The approaches in forecasting inflation. Engert
must be the restriction that 𝛼𝛼 + 𝜇𝜇 = 0 to rule out
general specification of this model can be and Hendry (1998) improved the M1-based
written as: 103 vector
| error-correction model (VECM)

developed by Hendry (2008), by imposing a 95) to last quarter of 2007-08 (Q4: 2007-
set of equilibrium conditions to better anchor 08), a VAR was developed and subsequently
the long run behavior of interest rates, the using Minnesota prior or Litterman’s prior
exchange rate and the output gap in the proposed by Litterman in 1980, a BVAR model
model. They found that this extended-VECM was developed. Based on the comparison of
provide considerable leading information forecasting performance of a VAR and BVAR
about forecasting the eight-quarter inflation model, measured in terms of out-of-sample
rate with relatively small errors. percentage root mean square error (RMSE),
they found that BVAR model performed
Alturki and Vtyurina (2010) explained the better than VAR model in the case of inflation
short and long term dynamics and inflation as well as IIP growth forecast.
forecasts in Tajikistan using the VECM and
autoregressive moving average (ARMA). Other authors who assessed the performance
Their results show that the ARMA model out- of the BVAR against other models includes
of-sample forecast clearly outperforms the Kenny et al. (2008), Giannone et al.
forecasts of the VECM, possibly due to the (2010), Cuaresma et al. (2009) and Huang
limited sample used in the VECM. Engert and (2012). Kenny et al. (2008), focused on the
Hendry (1998) improved the M1-based vector development of multiple time series models
error-correction model (VECM) developed for forecasting Irish Inflation. They employed
by Hendry (2008), by imposing a set of the BVAR, which allows the estimated
equilibrium conditions to better anchor the models to combine the evidence in the data
long run behavior of interest rates, the with any prior information which may also
exchange rate and the output gap in the be available. A large selection of inflation
model. They found that this extended-VECM indicators were assessed as potential
provide considerable leading information candidates for inclusion in a BVAR. The
about forecasting the eight-quarter inflation results confirm the significant improvement
rate with relatively small errors. Alturki and in forecasting performance which can be
Vtyurina (2010) explained the short and long obtained by the use of Bayesian techniques
term dynamics and inflation forecasts in over the other forecasting models.
Tajikistan using the VECM and autoregressive
moving average (ARMA). Their results show Giannone et al. (2010) constructed a large
that the ARMA model out-of-sample forecast Bayesian Vector Autoregressive model (BVAR)
clearly outperforms the forecasts of the for the Euro Area that captures the complex
VECM, possibly due to the limited sample dynamic inter-relationships between the
used in the VECM. main components of the Harmonized
Index of Consumer Price (HICP) and their
Biswas et al. (2010) developed a forecasting determinants. They evaluated the model in
model for inflation as well as Index of Industrial real time and found that it produces accurate
Production (IIP) growth in a multivariate forecasts than other multivariate models.
time series Bayesian framework, known
as Bayesian Vector Autoregressive (BVAR) Akdogan et al. (2012) produced short-term
Model. They argued that the main advantage forecasts for inflation in Turkey, using a large
of using this model is the incorporation of number of econometric models such as the
prior information which may boost the univariate ARIMA models, decomposition
forecasting performance of the model. Using based models, a Phillips curve motivated
the quarterly data on wholesale price index time varying parameter model, a suit of
(WPI), narrow money ( M1) and IIP during the VAR and Bayesian VAR models and dynamic
period of first quarter of 1994-95 (Q1: 1994- factor models. Their result suggests that the

93
) produced Akdogan
number et uncorrelated
al. (2012)
of econometric
short-term produced
models
withsuch short-term
theiras thelagged
own uncorrelated
variables.
values A VECMwith
and their is
therefore own lagged values
a restricted VAR and
yesian VAR forecasts
step consists of
for inflation
testing for
in Turkey,
cointegration
using athelarge
among
uncorrelated with nonstationary
all of the right-hand
n Turkey, univariate ARIMA
using a large models, decomposition
uncorrelated with all based
of designed
right-hand for use with
side series that side
Their result number
the variables whichmodels
requires pretesting of the A VECM therefore is a restricted VAR
c models models, the of econometric
such asa Phillips curveC Emotivated
variables.
N TAR AVECMtime
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nonstationary designed
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for nonstationary series that
cointegration among
he random
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and dynamic
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Their varying
result
to be cointegrated. are
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Therefore to be cointegrated.
first which Therefore
requires pretesting of the
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3.2.2 Unit
parameter model, root tests andandCointegration
ofahead. models
VAR and suggests
Bayesianwhich
that
VARthe stepaconsists
models suit
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more
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more
for VAR stationarity
cointegration step
itself toconsists
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testing
Augmented
property for series.
the time cointegration among
Dickey-Fuller (1979)
information
tor models.economic There
models
Their resultand are
dynamic
outperformed
information various
factor
the
the outperformed tests
models.
variables which random for
Their
therequires identifying
walkresult and the
random pretesting of the non-
variables
Phillips-Perron which requires
(1988) pretesting
tests. of the
Gujarati
model atstationarity
least upstationarity
to to
two quarters ahead. 3.2.2 Unit
(2003) root tests
suggests and Cointegration
thatof the
cointegration
walksuggests
which incorporate
model atthat
more leastthe
upmodels
or the
two which
property
quarters incorporate
presence of of
theunit
ahead. time more
roots
series. stationarity
in time property time series. of two
or
There moreare times
variousseries
tests indicates the presence
for identifying non-
utperformed theeconomic
seriesinformation
random data, however outperformed the random
this study limitedofitself to
3.0
3.0 METHODOLOGY
Methodology 3.2.2 Unit root tests and Cointegration
walk model at least up to two quarters ahead.
a long-run
3.2.2
stationarity Unit or equilibrium
rootpresence
or the tests unit rootsrelationship
andofCointegration in time
two quarters ahead. between them. Ackowledging the existence
the Augmented Dickey-Fuller (1979)
There are various tests for identifying and Phillips-
There
series data,non-however this study limited itself tonon-
are various tests for identifying
3.1 Overview
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ight onmodels
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106(BVAR)
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Bayesian Vector AutoregressionThe BVAR
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The BVAR is in the family of the VAR models; parameters 3.2.5 The Autoregressive prior Di
be cointegrated. Therefore the first step Model The BVAR
(BVAR) is in the family of the VAR models; of the VAR. This ideolo
however it differs by imposing restrictions on the restrictions (ARDL) Phillips Curve
consists of testing for cointegration among however it differs by imposing restrictions in econometric e
the variables which requires pretesting of on the parameters of the VAR. This ideology The BVAR
parameters is
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of prior
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to impose restrictions
econometric the
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94
some known distribution called prior test, we determine the orde
Central Bank Of Swaziland © 2018 idea behind the BVAR is to impose restrictions ARDL
In this study a BVAR model for Sw
distributions. variables using the unit root
developed which will allow fo
(shrinkage) by the way of prior information
between the on
to ensure develo
that macroeconomi
major the variables
on coefficients of the VAR. Therefore in The ARDL Phillips curve model used in this
BVAR model, the coefficients are considered study will follow that in Stock and Watson
as variables with some known distribution (2008) and be presented as follows:
called prior distributions. Research Bulletin Volume 2
∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 = 𝑎𝑎0 +
∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 = 𝑎𝑎0 + 𝑏𝑏1 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡−1 + 𝑏𝑏2 ∆𝑂𝑂𝑂𝑂𝑂𝑂𝑡𝑡 Thus, an e
In this study a BVAR model for Swaziland will 𝑝𝑝 +
as follows
be developed which will allow for interactions + ∑ 𝑐𝑐𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡−𝑖𝑖
between the major macroeconomic variables 𝑖𝑖=1 Research Bulletin V
and further produce inflation forecasts 𝑝𝑝 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶
+
which will be compared with results from + ∑ 𝑑𝑑𝑖𝑖 ∆𝑂𝑂𝑂𝑂𝑂𝑂
other forecasting models. ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 = 𝑎𝑎0 + 𝑏𝑏1 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 +𝑡𝑡−𝑖𝑖𝑏𝑏+ 𝜖𝜖∆𝑂𝑂𝑂𝑂𝑂𝑂
𝑡𝑡−1
𝑡𝑡
2 𝑡𝑡 Thu
𝑖𝑖=1
𝑝𝑝 Where ∆ is the diffe
Despite the abundance of the priories inWhere ∆ is the difference operator, 𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 islogarithm the
as f
of Swaz
literature, many authors found that thelogarithm + ∑of𝑐𝑐𝑖𝑖Swaziland ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 𝑡𝑡−𝑖𝑖
CPI and 𝑂𝑂𝑂𝑂𝑂𝑂𝑡𝑡 islogarithm
Research Bullet
the ResearchofBulletin
Litterman priori outperforms the other Where Where outp
𝑖𝑖=1 is the
∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 difference
𝑡𝑡 = 𝑎𝑎0 + 𝑏𝑏1 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 operator, + 𝑏𝑏2 ∆𝑂𝑂𝑂𝑂𝑂𝑂
𝑡𝑡−1 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 𝑡𝑡 = 𝑡𝑡is𝑎𝑎0 + 𝑏𝑏1ci ∆T
logarithm
priories. For example Huang (2012) found the logarithm of output minus the logarithm of
potential output, a
∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 = 𝑎𝑎 +
𝑡𝑡 of 0Swaziland 𝑏𝑏 𝑝𝑝∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 CPI𝑡𝑡−1 and2+ 𝑏𝑏 ∆𝑂𝑂𝑂𝑂𝑂𝑂 𝑡𝑡 coefficien
is 𝑝𝑝 Th
that the Minnesota prior of Litterman (1986)potential
𝑝𝑝 1
output, and 𝜖𝜖𝑡𝑡 is 𝑝𝑝the error term. first The step in the ∆𝑙𝑙aA
the logarithm of output + ∑ 𝑐𝑐𝑖𝑖minus ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 the 𝑡𝑡−𝑖𝑖 logarithm + ∑as𝑐𝑐
equilibriu
is the best among all priors consideredfirst+ of ∑in𝑑𝑑the
step
potential ∆𝑂𝑂𝑂𝑂𝑂𝑂
ARDL
output, + bounds
∑ and +𝑐𝑐 𝜖𝜖 approach
is
∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶 the is
error to term.
𝑖𝑖 𝑡𝑡−𝑖𝑖 𝑖𝑖 𝑡𝑡
𝑖𝑖=1 𝑡𝑡−𝑖𝑖 estimate the abov
Once 𝑝𝑝the
𝑖𝑖=1
when forecasting Chinese inflation and The first step in the𝑖𝑖=1 ARDL by bounds ordinaryapproach is
𝑝𝑝
estimate the above equation least
output. Furthermore the Minnesota prior to 𝑖𝑖=1 estimate the above equation
squares (OLS). cumulativ This
∆
𝑡𝑡−𝑖𝑖 by 𝑡𝑡ordinary + ∑ 𝑑𝑑
+ 𝑝𝑝∑ 𝑑𝑑 ∆𝑂𝑂𝑂𝑂𝑂𝑂 + 𝜖𝜖
𝑖𝑖
squares
is fine-tuned to most macroeconomic data least squares (OLS). (OLS). This would test for the existence a of
long-run relation
+∑ 𝑖𝑖=1𝑑𝑑𝑖𝑖 ∆𝑂𝑂𝑂𝑂𝑂𝑂
This would 𝑡𝑡−𝑖𝑖 + test𝜖𝜖𝑡𝑡 for the and the 𝑖𝑖=1 C
in particular somethingWhere that shows whyadifference
∆ is the long-run operator,
relationship
existence of a long-run relationship among
𝑖𝑖=1 𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶
the variables is the
by among
𝑡𝑡 conducting an F te
applied to
Bayesian VARS can provide more freedom the Where variables ∆ is the by difference
conducting operator, Where
an F𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶
∆test 𝑡𝑡 is
is the for the
difference
conducting an F test for the joint significance of
the coefficients
to modelers by allowing logarithm
subjective as ofwellSwaziland
the Where
joint
logarithm ∆ isCPI the
significance and
of difference
Swaziland 𝑂𝑂𝑂𝑂𝑂𝑂
operator,
ofCPI the andis the
𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶
coefficients
𝑂𝑂𝑂𝑂𝑂𝑂 𝑡𝑡 is
isthe ettheal., 199o
the coefficients of the lagged levels 𝑡𝑡logarithm
of the 𝑡𝑡 of Swaziland
as objective fine tuning (Litterman, 1986). of logarithm the lagged levels
ofofSwaziland ofminus the and
CPI variables. variables.
𝑂𝑂𝑂𝑂𝑂𝑂 𝑡𝑡 is The the The Wh nullW
In that regard, this studylogarithm
will use onlyofthevariables. logarithm output the
logarithm logarithm of of
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specification a proxy predictsfor(2001)
model, thewhe
𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡−𝑖𝑖Research Bulletin Volume 2 supply shock terms are which is the and
𝑡𝑡−𝑖𝑖 zero,
all proxy hencefor excess it is demand, 𝑂𝑂 T
inertia, 𝑂𝑂𝑂𝑂𝑂𝑂 are steady
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supply shock inflation terms
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erminants of inflation rate, namely;
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triangle 𝑡𝑡−𝑖𝑖for arethe
model also includes supply shock
𝑝𝑝 𝑞𝑞
Where μmodel is the a constant, 𝛾𝛾𝑖𝑖 is
the demand shock, integrated
the I denotes of order integration. one, theFor becomes
Swaziland for anthe coefficie
parameter instabil
estim
3.3.2 Atkeson-Ohanian
The
𝑦𝑦𝑡𝑡 shock
= 𝜇𝜇model, random-walk
+ (1997)
∑ 𝛾𝛾 coefficient
𝑖𝑖 𝑦𝑦𝑡𝑡−1
(2001)
+ 𝜖𝜖𝑡𝑡 the + model
∑of the
𝜃𝜃𝑖𝑖 CPI
𝜖𝜖𝑡𝑡−1 proposed
lagged moving by average term.
per the critical
riable.
ces,
l also
value ofbounds
which This
includes
triangle variables.
isspecification
asupply
model also Following
proxyshock forpredicts the
includes supply Gordon Whenever refersthe to data
the
lagged forinflation.𝑦𝑦𝑡𝑡 is non-stationary
autoregressive term, andand 𝜃𝜃c
𝑖𝑖=1 𝑖𝑖=1 will be 2014:Q1 t
itical bounds variables.specification Following ofGordon The
Atkeson-Ohanian
(1997) second
theCentral Bank
benchWhenever
integrated of Swaziland
(2001) mark of the order ©data
is 2018
the
one, forthe 𝑦𝑦𝑡𝑡 is
Atkeson-Ohanian
model non-stationary
becomes anand i
F-statisticGordon
llowing is lower (1997) the the triangle model a which
P3.3.2 g e The will be
random-walk coefficient model proposed of the lagged moving
by ahead. avera
ble. when This the output
specification gap predicts and the quarters
istic is lower specification of the triangle model Wherewhich μ will
is a be constant, integrated
𝛾𝛾 is the of
coefficient order one,
for the the model becomes an
e. Otherwise, the
the triangle model which used will in bethis paper is asThe (2001)
follows: second Atkeson-Ohanian
random
bench walk
𝑖𝑖
mark
(2001)
model,
is the
Whenever in which
Atkeson-Ohanian
the data the for forecast
𝑦𝑦 𝑡𝑡 is non-statio
rms are
hen the the all output zero, in gap and andhence is asthe it is lagged autoregressive The second bench mark is the Atkeson-
herwise,
per
used this paper follows: P a g e term,
Central Bank of
and integrated
Swaziland
𝜃𝜃𝑖𝑖 is ©ofthe order 3.5
2018 one,Forecast the model Evaluabec
e. is as follows: Research𝑝𝑝Bulletin(2001) Volume of the 2 random four-quarter
Ohanian
𝑝𝑝 walk (2001) rate
model,
random
P a g emoving average term. of in inflation
walkwhich model, theis inthe
forecast
which average
Pseudo out-of-sam
sedarewithout all zero, aandconstant hence𝑝𝑝 it is term coefficient 𝑝𝑝
ofthe the forecast
lagged of the four-quarter rate of
ed rate Where
of inflation the𝑝𝑝 lagged𝐶𝐶𝐶𝐶𝐶𝐶∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶
rate
conveys 𝑡𝑡of= inflation
∑ 𝑏𝑏𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶
ARIMAof𝑐𝑐the
Whenever rate model,
𝑡𝑡−𝑖𝑖 +of∑
four-quarter 𝑐𝑐𝑖𝑖 𝑙𝑙𝑙𝑙𝑙𝑙𝑂𝑂𝑂𝑂𝑂𝑂
inflation
where
inflation foristhe 𝑦𝑦theover
rate ofthe
𝑡𝑡−𝑖𝑖I non-stationary
denotes
𝑡𝑡 is average
inflation
P a g rate
previous
integration. of andisinflationfouraverage
the quarters.
over
captures model spe
ng-run relationship ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡 =𝑡𝑡−𝑖𝑖∑ 𝑏𝑏𝑖𝑖 ∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶𝑡𝑡−𝑖𝑖 + ∑ 𝑙𝑙𝑙𝑙𝑙𝑙𝑂𝑂𝑂𝑂𝑂𝑂the data e
This
without
∑relationship
𝑏𝑏
are
model
∆𝑙𝑙𝑙𝑙𝑙𝑙𝐶𝐶𝐶𝐶𝐶𝐶
𝑖𝑖 the conveyslags
a
+
𝑡𝑡−𝑖𝑖 of
will
∑ the𝑐𝑐
inertia, be
constant estimated
𝑙𝑙𝑙𝑙𝑙𝑙𝑂𝑂𝑂𝑂𝑂𝑂
𝑖𝑖 logarithm
term
are 𝑖𝑖=1 by
of the lags For
𝑖𝑖
of
the the
𝑡𝑡−𝑖𝑖
𝑖𝑖=1
the previous four quarters. The Atkeson-
1ic parameters logarithm can of
𝑖𝑖=1 output
𝑖𝑖=1 𝑡𝑡−𝑖𝑖
minus +
the
integrated
rate
𝑖𝑖=1
∆𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
logarithm The +ofSwaziland
𝜖𝜖
of order model,
Atkeson-Ohanian
inflationOhanian
one,
over
model
thethe 𝑦𝑦model
thus
refers
𝑡𝑡 modelprevious
is
becomes to
presented thus the four anisCPI
as:presented instability,as:and e
quarters.
ameters
is model
quares can
(OLS) willofbe estimated + ∆𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 by + 𝜖𝜖𝑡𝑡 inflation. 𝑡𝑡 𝑡𝑡
the logarithm
ofcorrection
potential potential
output, output, which is𝑡𝑡 the proxy for
n+ error
∆𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑡𝑡 + 𝜖𝜖𝑡𝑡 The Atkeson-Ohanian
Central Bank of Swaziland © 2018 𝜋𝜋𝑡𝑡+4 model = 𝜋𝜋𝑡𝑡thus + 𝜀𝜀𝑡𝑡+4 is presented as:
r correction
oxy
res for
(OLS) excess
excess demand,
demand, 𝑂𝑂𝑂𝑂𝑂𝑂 𝑡𝑡−𝑖𝑖 are
are the lags
P a g ofe oil
nng-run
enchmark
estimates. estimates.
prices, models
which is a proxy for the supply 3.3.2shock The random-walk
Where 𝜋𝜋𝑡𝑡+4 =
model
is the 𝜋𝜋𝑡𝑡 proposed
+
four 𝜀𝜀𝑡𝑡+4 quarter ahead rate
by
prices, which is a proxy for the
variable. This specification predicts Where
steady
Atkeson-Ohanian 𝜋𝜋𝑡𝑡+4(2001)
108 | of inflation.
is108the | four quarter ahead rate of
chmark
ariable.
regressive Moving AverageThismodels specification predicts
108 |
The Where inflation.
second 𝑡𝑡+4 ismark
𝜋𝜋bench the isfour quarter ahead rate of
the Atkeson-Ohanian
n when the output gap and the
ressive Moving Average (2001) random walk model, in which the forecast
markwithout
96
erms are all zero, Central
model ato constant
and hence Bank Of Swaziland
be usedterm
it is
in the
© 2018
inflation.
of the3.4 Pseudo rate
four-quarter out-of-sample of inflation is forecast the average
ated
3.2 pecification
The random-walk predicts
demand, 𝑂𝑂𝑂𝑂𝑂𝑂 𝑡𝑡−𝑖𝑖 are model proposed by
3.3.2second
The bench mark model
The random-walk is the Atkeson-Ohanian
proposed by
output
hkeson-Ohanian gap
is a proxy forC(2001)and the
the (2001) random walk
E N T R A L B A N K O F S WA Z I L A N D
Atkeson-Ohanian
|
model, in which the forecast
RESEARCH BULLETIN VOLUME 2
(2001)
zero, and hence
epecification
second bench
predicts itmark
is is the Atkeson-Ohanian
of thesecond
The four-quarter
bench mark rate ofisinflation is the average
the Atkeson-Ohanian
001)
output a constant
random
gap3.4 walk
and termthemodel, in whichforecast the forecast
Pseudo rate of random
out-of-sample
(2001) inflationwalk overmodel,
theunderlying
previous
in which four
this testquarters.
the is that if a single forecast
forecast
will
the be estimated
four-quarter
zero, and hence it is methodology.
rateby of inflation is the average contains all information contained in the
All forecasts willof Thebe theAtkeson-Ohanian
computed
four-quarter themodel
using rate ofother thus isispresented
individual
inflation theforecasts.
average as:The forecasts
e aof inflation
constant over
pseudo termthe previous four quarters.
out-of-sample forecast methodology, will be combined in pairs to produce three
that is, for a forecast rate of madeinflation 𝜋𝜋
at dateover = 𝜋𝜋 +
, alltheforecast
𝑡𝑡+4 𝜀𝜀
𝑡𝑡previous four quarters.
𝑡𝑡+4combinations. The forecasts from
e Atkeson-Ohanian
will be estimated estimation, bymodel
lag length thusselection,
is presentedetc, will as:
be the VECM will be combined with those of
models The Atkeson-Ohanian
available throughmodel thus
BVAR,isand presented
performed using only
𝜋𝜋 = 𝜋𝜋 + Where
𝜀𝜀
data
𝜋𝜋𝑡𝑡+4 is the fourthe quarter ahead rate as:
the benchmarks
of combined
date 𝑡𝑡+4 . The forecasts
𝑡𝑡 𝑡𝑡+4in this section will be together.
oving Average recursive, so thatinflation. forecasts at date𝜋𝜋𝑡𝑡+4 = 𝜋𝜋𝑡𝑡 + 𝜀𝜀𝑡𝑡+4
are
all available data from the initial 3.8 Data
here 𝜋𝜋𝑡𝑡+4 based
models is theonfour quarter ahead rate of
period, which is 1990:Q1 in this study through All the data to be used in this study are
Where
3.4 Pseudo is the four quarter
𝜋𝜋𝑡𝑡+4out-of-sample forecastahead rate of
lation. date t, which is 2013:Q4. This period will be secondary data which will be sourced
to beAverage
oving used in the
used for parameter estimation. The forecast from the Central Bank of Swaziland (CBS)
inflation.
methodology.
ve Moving Average horizon will be 2014:Q1 to 2015:Q4, which is and the Central Statistical Office (CSO).
4 Pseudo out-of-sample eight quarters ahead. forecast Data transformation will be carried out
3.4 Pseudo out-of-sample forecast
tocombines
ethodology. be used inboth the
3.5 Forecast Evaluation
where necessary. Since the study will use
quarterly data, annual data like GDP will be
All forecasts will be computed using the pseudo
methodology.
oving
ve Moving average Pseudo
Average(MA) out-of-sample forecast evaluation disaggregated to quarterly while monthly
captures model out-of-sample specification uncertainty, data like inflation
forecast methodology, that is, willfor bea aggregated to
hatcombinesthe time series
modelboth instability, and estimation uncertainty, quarterly.
forecasts will be computed using the pseudo
in addition to the forecast
All usual made
forecasts at date
uncertainty
will be of t, all estimation,
computed using the lagpseudo
length
rgely determined
oving average future (MA) by (Stock
events and Watson, 2008).
t-of-sample forecast methodology, that is, for a 4.0 FINDINGS AND DISCUSSIONS
Therefore the performance selection, etc, will
evaluation be
out-of-sample forecast methodology, ofperformed using that only data
is, for a
ding
hat period
the time and seriesthe
ecast made at date t, all estimation, lag length
the competing models is to determine which 4.1 Unit Root Tests
of general
them are more available
forecast
precise madeandthrough at date
reliable date t.According
for t, all The forecasts
estimation, lag in this
length
trgelyerror. The
determined by to Granger (1969), stationarity
ection, etc,forecastingwill be performed headline inflation usingover only thedata
eight tests are the pre-tests for avoiding spurious
section
selection, will be
etc, recursive,
will so that forecasts
beofperformed using at date
presented
ding period in and
Asterou
quarter forecast
the horizon. The quality regressions. Theyonly are datathe starting point
ailable through date t.forecasts
the obtained The forecasts
will be in this
tested using
t are based
available on all available
through
in any
date t.regression
The
cointegration
dataforecasts
from theininitial analysis
this
as well as
(p,
t error. q) model four of the
classical statistical loss functions: Mean
ction willThe general so that forecasts at date
beAbsolute
recursive, analysis. A series is said to be
Error (MAE), period, will
section
Mean which
Absolute is 1990:Q1
Percent
be recursive, sointhat thisforecasts
nonstationary study through
if it contains
at date a unit root, hence
presented in Asterou
Error (MAPE),
re based on all available data from the initialthe Root Mean Squared Error testing for stationarity is simple testing for
(RMSE), and the Thiel’s date t, which
Coefficient. is
t are based on all available 2013:Q4. This
the data period
presence from will
of the be
a unit used
root in a series. In
initial
(p, q) model of the
riod, which is 1990:Q1 in this study through
𝑞𝑞 nonstationary series, the order of integration
3.6 Forecast Combination for parameter estimation.
period, which is 1990:Q1is determined The forecast
in this study by the horizon
through
number of times it has
𝜖𝜖te𝑡𝑡 +t, ∑
which 𝜃𝜃𝑖𝑖 𝜖𝜖𝑡𝑡−1
is 2013:Q4.
Bates and Granger This(1969)period will bethe
introduced usedidea to be differenced to attain stationarity. One
𝑖𝑖=1 that a combination will
date t,bewhich
of forecasts 2014:Q1
outperforms to 2015:Q4,
is 2013:Q4. Thisofperiod
way
which
testing will
is
be eight
used or otherwise
for stationarity
parameter
𝑞𝑞 anyestimation.
individual forecast, The forecast as different horizon
models is through graphical inspection of the series
quarters
for parameter ahead.estimation. The forecast horizon
he coefficient havefor their
the own merits. Acknowledging the to be used in the estimations. The graphical
𝜖𝜖ll𝑡𝑡 +be∑2014:Q1𝜃𝜃𝑖𝑖 𝜖𝜖𝑡𝑡−1
existence to of2015:Q4,
different approaches which is eight
to combine analysis serves as a benchmark for the formal
𝑖𝑖=1 forecasts, in this will
3.5 Forecast Evaluation measure ofwhich
study be
the 2014:Q1
Combination to
Test 2015:Q4, is eight
m, arters andahead. 𝜃𝜃𝑖𝑖 is the unit root. The figure below shows
of Chong and Hendry (1986) and refined by the graphs of the variables to be used in this
quarters
Pseudo ahead.
out-of-sample forecast evaluation
oving average
he coefficient for the term.
Timmermann (2006) will be used. The idea paper.
5 Forecast Evaluation
m,non-stationary
and 𝜃𝜃𝑖𝑖 is and the captures
3.5 Forecast model specification uncertainty, model
Evaluation
eudo out-of-sample forecast evaluation
oving model becomes
average term. an instability,out-of-sample
Pseudo and estimation forecast uncertainty,
evaluation in
ptures model specification uncertainty, model
8
non-stationary and captures model specification uncertainty, model 109 |
stability, and estimation uncertainty, in
model becomes an instability, and estimation uncertainty, in
109 |
97
8 109 |
Figure 4: Graphical unit root tests Source: 4.2 Cointegration

Model outcomes After determining the order of integration of
the variables, the next step is to determine
whether there is cointegration between the
variables. This is to establish if the linear
relationship of the variables is stationary.
If the null hypothesis of no cointegration is
rejected then the linear combination of the
variables is stationary, hence a non-spurious
long-run relationship exists between the
variables and as such, consistent estimates
of the long run relationship is evident. To test
for cointegration between these variables,
the Johansen test is applied. The first step
in conducting the test was to identify the
optimal lag length, where results chose 2
Source: Model outcomes as the optimal lag length. From literature
The graphs on Figure 4 show that it is apparent and the structure of the Swaziland economy,
that the series are non-stationary at levels. the most preferred variables which will be
The conclusion of non-stationarity is arrived used as the predictors of inflation in the VAR
at after observing that none of the graphs are the US dollar, the three months deposit
fluctuate around a zero mean, an indication rate, private sector credit, crude oil prices,
of stationarity. The other characteristic money supply, South Africa CPI and Swaziland
of the series is that most of the variables CPI. Cointegration results conclude the
show a sign of a trend. The problem with existence of a long run relationship among
the visual inspection technique is that the the variables, and we go on to estimate the
approach is very subjective, hence the need Vector Error Correction Model (VECM).
to use statistical techniques to reach a
proper conclusion. 4.2.1 The Vector Error Correction Model
(VECM)
4.1.1 Augmented Dicky Fuller (ADF) and Given that the variables are co-integrated,
Phillips-Perron (PP) Unit Root Tests one can proceed to estimate the VECM
Acknowledging the existence of different model. The VECM contains information on
types of unit root tests, this paper utilizes both the long run and short run relationships
the ADF and the PP unit root tests. The between the variables. The cointegrated
reason for that is that they are very popular variables must have an error correction
in literature and very easy to apply and representation in which an error correction
understand, and to further compare the term (ECT) must be incorporated into the
results. model. Accordingly, a VECM is formulated
to reintroduce the information lost in the
The number of lags included in the tests is differencing process, thereby allowing for
based on the Akaike Information Criterion long-run equilibrium as well as short-run
(AIC) automatic selection. The test results dynamics (Ang and McKibbin, 2006). The
show that all the variables, save for the 3 results from the best model, which involves
months deposit rate and output gap whose only four variables of the ECM (Swaziland
stationarity was found to be I(0), were found CPI, RSA CPI, credit extension, and money
to be nonstationary at levels and had to be supply), are shown below. The results show
differenced once to attain stationarity. that money supply, credit extension, and

Swaziland CPI affects the direction of local the same variables which were used in the
CPI after 2 lags, whereas RSA CPI affects it VECM. Furthermore since cointegration
after 1 lag in the short run. Furthermore the was found to exist among the variables, we
speed of adjustment towards equilibrium is proceed to estimate the BVAR, by applying
30 per cent as shown by the coefficient of the the Litterman/Minnesota prior as explained
ECM. That means about 30 per cent of any in the methodology that they are the most
disturbance from equilibrium is corrected common in literature. A key issue in the
every quarter. estimation of Bayesian VARs is the choice of
hyper-parameters which determine overall
Table 2: ECM Model Results tightness, the tightness on the prior mean of
Variable Coefficient Std. Error t-Statistic zero on cross lags in each equation, and the
D(LSDCPI(-1)) 0.038855 0.10020 0.38776 decay parameter. A complete search over all
possible hyper-parameters is not justifiable
D(LSDCPI(-2)) 0.281508 0.09856 2.85615
as it merely transfers the problem of over-
D(LSACPI(-1)) 0.57484 0.14720 3.90512
parameterization to one of two many hyper
D(LSACPI(-2)) -0.137704 0.15622 -0.88147 parameters to estimate. For the purpose
Variable Coefficient Std. Error t-Statistic of this study, the decay parameter was
D(LPSCR(-1)) 0.004702 0.01920 -0.40073 therefore set equal cross-variable weight
D(LPSCR(-2)) -0.047151 0.01941 -2.42861
to 0.99; which are commensurate with the
Minnesota prior. The results are in the table
D(LM2(-1)) -0.010839 0.02705 -0.40073
below.
D(LM2(-2)) 0.041884 0.02671 1.56791
ECM (-1) -0.303950 0.00616 -4.93338 Table 4: BVAR Model results
Source: Model outcomes Variable Coefficient Std. t-Statistic
Error
The results in the table below shows that D(LSDCPI(-1)) 0.619348 0.05644 10.9744
the VAR characterizes the data generating
D(LSDCPI(-2)) 0.100586 0.04251 2.36605
process fairly well, as the model passes the
D(LSACPI(-1)) 0.319830 0.07675 4.16703
tests of autocorrelation, normality, functional
D(LSACPI(-2)) -0.034866 0.06319 -0.55172
specification and heteroskedasticity,
D(LPSCR(-1)) 0.022807 0.01082 2.10754
whereby the probabilities are grater than
0.05, which is the rule of thumb. Furthermore D(LPSCR(-2)) -0.000331 0.00881 -0.03754
the model is correctly specified as reported D(LM2(-1)) -0.007342 0.01352 -0.54297
by the F-test values, hence it can be used D(LM2(-2)) 0.000390 0.01218 0.03204
for forecasting.
Just like the VECM, the estimated model
Table 3: Results of diagnostic tests passes all the diagnostic tests. The analysis
Significance X2 statistic Probability of the results are almost similar to those of
Breusch–Godfrey serial 17.34 0.36 the VECM. From the results, save for money
correlation LM test supply, all the variables are significant in
White 578 0.12 explaining the movements in the domestic
Heteroskedasticity test CPI, with the exception of lag 2 for RSA CPI
Jarque–Bera test 5.55 0.70 and credit extention.
Ramsey RESET test (log 0.14 0.72
likelihood ratio) 4.4 The Autoregressive Distributed Lag
(ARDL) Phillips Curve
4.3 The Bayesian VAR The ARDL Phillips curve model can be
The BVAR used in this paper arise from estimated by using the ARDL bounds test

99
cointegration procedure, developed by is negative and statistically insignificant,

Pesaran et al. (2001). The ARDL bounds test indicating that although the variables were
is based on the assumption that the variables found to be cointegrated; it can be safely
are I(0) or I(1), but not I(2). The variables said that the Phillips curve does not exist in
which were used in this model are inflation the Swaziland data in the long run. That is
and output gap. From the unit roots tests because for the Phillips curve to exist in the
previously performed, both these variables data, the coefficient of output gap should be
were found to be I(0). From literature, it is positive and statistically significant. Since
believed that there is a positive relationship cointegration was found, we proceed to
between inflation and some lags of output estimate the error correction model, whose
gap, meaning a rise in inflation is associated results are shown below.
with lagged rise in output although with some
lags. The AIC lag length selection criterion Table 7: Short Run Model Results
was used and the model estimated is an ARDL Variable Coefficient Std. t-Statistic Prob.
(5, 1). The bounds test for cointegration Error
results are shown below. D(INFL(-1)) 0.013989 0.1017 0.137435 0.8910

Table 5: Bounds test for cointegration D(INFL(-2)) 0.238988 0.1006 2.374740 0.0199
Test Statistic Value k D(INFL(-3)) 0.143380 0.1017 1.408644 0.1627

D(INFL(-4)) -0.226114 0.1034 -2.185729 0.0317
F-statistic 8.046502 1 D(GGGAP) 0.004322 0.0019 2.264026 0.0262
CointEq(-1) -0.139933 0.0603 -2.318064 0.0229
Critical Value Bounds
It is interesting to note that from these
Significance I0 Bound I1 Bound
results, the Phillips curve could exist in the
10% 4.04 4.78 short run in Swaziland data as the coefficient
5% 4.94 5.73 of the output gap carries the correct sign and
2.5% 5.77 6.68 is significant. That contradicts the results of
1% 6.84 7.84 the long run equation that the Phillips curve
does not exists in the Swaziland data. On
From these results, it is clear that there the other hand the speed of adjustment was
is a long-run relationship amongst the two found to be significant and carries the correct
variables because the F-statistic (8.047) is sign, meaning that about 14 per cent of any
higher than the upper-bound critical value disequilibrium is corrected every quarter.
(7.84) at the 1per cent level. This implies For the purpose of this paper, this model was
that the null hypothesis of no cointegration then subjected to various diagnostic tests to
among the variables is rejected. Once assess its suitability for forecasting. Results
cointegration is established, the ARDL long- of these tests are shown in the table below.
run model is estimated, whose results are
shown below. Table 8: Results of diagnostic tests
Significance X2 statistic Prob
Table 6: Long Run Model Results
Variable Coefficient Std. t-Statistic Prob. Breusch–Godfrey serial 0.828 0.51
Error correlation LM test
GGAP -0.0101 0.008 -1.336 0.185 White 2.14 0.04
C 7.2774 1.097 6.633 0.000 Heteroskedasticity test
Jarque–Bera test 31.98 0.00
Specifically, the long run coefficient of output Ramsey RESET test 0.367 0.55
gap when inflation is the dependent variable (log likelihood ratio)

From these results, it was observed that the approach. Cointegration in this approach exists if
model could not pass all the tests, as it fails the the residuals from the long run estimated
normality
From theseandresults,
heteroskedasticity tests, as
it was observed shown
that the equation
Table are stationary
9: Triangle Modelatresults
their levels. The results
model could not pass
by the probabilities alland
of 0.00 the0.04,
tests, as it fails
respectively, of the estimated
Variable model are
Coefficient Std.shown below. Prob.
t-Statistic
the normality and heteroskedasticity tests, Error
in the table. Regardless of that, the model stability INFL(-1)9: Triangle
0.8869 Model
0.0506 17.49505 0.0000
as shown by the probabilities of 0.00 and Table results
was tested
0.04, for stabilityinbythe
respectively, the CUSUM
table. and CUSUM
Regardless GGAP(-1) -4.0135 29.114 -0.137856 0.8907
of that, the
of squares model
as shown in stability
the figureswas tested for
below. DLOIL -0.2173 0.9577 -0.226994 0.8209
Variable Coefficient Std. Error t-Statistic Prob.
stability by the CUSUM and CUSUM of squares C 0.8839 0.4481 1.972379 0.0516
as shown
Figure in the and
5: CUSUM figures below.
CUSUM of squares
Figure 5: CUSUM and CUSUM of squares INFL(-1)
From 0.8869
the results 0.0506
above, it was17.49505
observed0.0000
that
30 1.2
both the demand shock and supply shock
GGAP(-1) -4.0135 29.114 -0.137856 0.8907
20 1.0
variables
DLOIL were insignificant
-0.2173 and carried
0.9577 -0.226994 the
0.8209
10
0.8 wrongC signs. This
0.8839was expected
0.4481 due to
1.972379 the
0.0516
0
0.6 non-existent of the Phillips curve in the
-10
0.4 Swazi data. Testing for cointegration shows
-20
0.2
that
Fromthe variables
the results areit was
above, cointegrated as both
observed that the
0.0
residuals from this equation were found to
-30
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-0.2
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
thestationary
be demand shock and Performing
at levels. supply shockdiagnostic
variables
tests shows thatand thecarried
modelthesuffers from
CUSUM 5% Significance
CUSUM of Squares 5% Significance
were insignificant wrong signs.
serial
This wascorrelation andtothe
expected due the residuals
non-existentareof not
the
The results indicate the absence of any normally distributed, however the model
The results indicate the absence of any instability Phillipsheteroskedasticity
curve in the Swazi data. Testing for
instability of the coefficients because the passes and stability tests.
of theof
plot coefficients
the CUSUM becauseandthe plot of thestatistic
CUSUMSQ CUSUM cointegration shows that the variables are
generally
and CUSUMSQ fall inside
statisticthe criticalfall
generally bands of the
inside the Table 10: Results of diagnostic tests
cointegrated as the residuals from this equation
5critical
percent confidence interval of parameter Significance X2 statistic Probability
bands of the 5 percent confidence interval were found to be
Breusch–Godfrey stationary at
serial levels. Performing
5.74 0.00
stability, indicating the stability of the
of parameter stability, indicating the stability of correlation LM
diagnostic test shows that the model suffers
tests
model.
White Heteroskedasticity 0.823 0.48
the model. from
test serial correlation and the residuals are not
4.5 The Triangle model Phillips Curve Jarque–Beradistributed,
test 67.15
normally however the model0.00
passes
The
4.5 The Triangle
Triangle model PhillipsCurve
model Phillips curve was Ramsey RESET test (log 0.909 0.34
developed by Gordon (1982), and is based heteroskedasticity
likelihood ratio) and stability tests.
on
The three
Trianglebasic
model determinants
Phillips curve was of developed
inflation
rate, namely; inertia, Table 10:naive
Results of
by Gordon (1982), and isdemand,
based onand threesupply.
basic 4.6 The benchmark models
The major difference with the ADRL Phillips diagnostic tests
determinants
curve is thatoftheinflation
latterrate, namely;only
includes inertia,
the 4.6.1 The Autoregressive Moving Average
demand shock, whereas the triangle
demand, and supply. The major difference with model (ARMA)
X2
also includes supply shock variable, which The first benchmark
Significance
model which was used
statistic Probability
the ADRL Phillips curve is that the latter includes
in this case are commodity prices, proxied in the study is the Autoregressive Moving
onlyoiltheprices.
by demandCointegration
shock, whereas in the
this triangle
model Average (ARMA). This model combines both
Breusch–Godfrey serial
was
modeltested through
also includes the shock
supply Engelvariable,
and Granger
which autoregressive (AR) and moving average (MA)
correlation LM test 5.74 0.00
(1969) two step approach. Cointegration in terms. Whenever the series to be forecasted
White Heteroskedasticity
in this case are commodity prices, proxied by oil istest
not stationary and integrated
this approach exists if the residuals from the 0.823 of, say order
0.48
prices.run
long Cointegration
estimated in this model
equation are was tested
stationary one, then the model becomes ARIMA. The
Jarque–Bera test 67.15 0.00
at their the
through levels.
EngelTheandresults
Grangerof(1969)
the estimated
two step Box-Jenkins approach was used in model
model are of
Central Bank shown below.
Swaziland © 2018 selection, and the final model selected115was |
Page the ARIMA (2,1,2), results of which are shown
below.

101
determine which of them are more precise and However w
reliable for forecasting headline inflation over the to identify
eight quarter forecast horizon. The quality of the better in-
obtained forecasts will be tested using the previously
Table 11: ARIMA (2,1,2) results previously statedmodels

the competing four classical statisticalwhich
is to determine loss error as a
Variable Coefficient Std. Error t-Statistic Prob. of them are
functions: more
Mean precise
Absolute and(MAE),
Error reliable for
Mean shows that
C 7.9886 1.2534 6.3733 0.000 forecasting headline inflation over the eight
Absolute Percentage Error (MAPE), Root Mean in-sample,
AR(1) 0.8502 0.0472 18.004 0.000 quarter forecast horizon. The quality of the
Square
obtainedError (RMSE), will
forecasts and the Thiel’s Coefficient.
be tested using the the measur
AR(2) -0.7626 0.0649 -11.74 0.000
AR(3) 0.8993 0.0479 18.7 0.000 previously
These statedwillfour
evaluations classical statistical
be categorised into two;
loss functions: Mean Absolute Error (MAE), Table 13:
MA(1) 0.5130 0.0327 15.652 0.000 in-sample (1990Q1 to 2013Q4), and out-of-
Mean Absolute Percentage Error (MAPE),
MA(2) 0.9538 0.0266 35.802 0.000 sample (2014Q1 to 2015Q4).
Source: Model outcomes Root Mean Square Error (RMSE), and the Forecast
Thiel’s Coefficient. These evaluations will VECM
The model was then used to forecast inflation be categorised into two; in-sample (1990Q1
4.7.1 In-sample evaluation (1990Q1 to BVAR
eight quarters ahead. The forecasts trace to 2013Q4), and out-of-sample (2014Q1 to
2013Q4) PHILIPS
the actuals fairly well in-sample, with some 2015Q4).
divergence out-of-sample. TRIANGLE
The first step in in-sample evaluation is to
4.7.1 In-sample evaluation (1990Q1 to ARIMA
visually inspect the movements of all the
4.6.2 The random-walk model proposed 2013Q4) AOM
by Atkeson-Ohanian (2001) forecasts
The first against
step inthe actuals as
in-sample shown in isthe
evaluation to Mean square
The second bench mark model is the Atkeson- visually
figure inspect
below. the look
A closer movements of all
at the graph the
shows error
Ohanian (2001) random walk model, in which forecasts against the actuals as shown in the
that all the forecasts tracks the movements of the
the forecast of the four-quarter rate of figure below. A closer look at the graph shows
inflation is the average rate of inflation over actuals
that allinthe
the in-sample
forecastsperiod.
tracks the movements Eight quar
the previous four quarters. The Atkeson- of the actuals in the in-sample period. to 2015Q4
Ohanian model results are presented below. The secon
Figure 6: In-sample Forecasts Comparisons
Figure 6: In-sample Forecasts Comparisons
Table 12: Atkeson-Ohanian model results forecasting
18
Variable Coefficient Std. Error t-Statistic Prob. 16 in the oth

C 1.705617 0.423296 4.029371 0.0001 14
visually in
INFL(-1) 0.913861 0.101097 9.039407 0.0000 12
INFL(-2) 0.178800 0.137591 1.299501 0.1969

forecasts a
10
INFL(-3) -0.113476 0.137652 -0.824367 0.4118 8 ahead fore

INFL(-4) -0.194160 0.100256 -1.936643 0.0558 6
below. A
Source: Model outcomes 4
2
generally t
The lags two and three were found not 92 94 96 98 00 02 04 06 08 10 12
the actuals
to be statistically significant in the AO ACTUAL
PHILIPS
VECM
TRIANGLE
BVAR
ARIMA
period, ho
model, however we proceeded to use it for AOM
forecasting purposes and the forecasts from inflation in

this model are compared to the actuals in graph.
However with visual inspection it is not very
the graph below.
easy to identify the model which tracks the
actuals better in-sample. In that regard, Figure 7: O
4.7 Forecasts Evaluation
using the
Central Bankpreviously stated
of Swaziland © 2018 criterion and the
The major purpose of this paper is to P a g e
mean square error as an averaging method,
evaluate the forecast performance of the
the table below shows that the triangle
four models against the two benchmarks.
model is the best model in-sample, as shown
Therefore the performance evaluation of
by the lowest values of all the measures.

Table 13: In-sample Evaluation statistics is the best model in forecasting inflation
Forecast RMSE MAE MAPE Theil eight quarters ahead.
VECM 1.5932 1.217162 16.45786 0.093329
BVAR 1.7069 1.288774 16.55504 0.100007 Table 14: Out-sample Evaluation statistics
PHILIPS 1.3424 0.996753 13.06176 0.078916 Forecast RMSE MAE MAPE Theil
TRIANGLE 1.2337 0.914317 12.36371 0.072342 VECM 1.392668 1.307597 25.42017 0.123055
ARIMA 1.4492 1.081336 14.81903 0.084847 BVAR 0.809370 0.680443 12.64060 0.074615
AOM 1.3543 1.009655 13.31094 0.079596 PHILIPS 1.391884 1.123842 20.38211 0.138399
Mean 1.3318 0.995632 12.99070 0.078217 TRIANGLE 1.525228 1.087103 19.32947 0.153205
square
error ARIMA 0.931882 0.815626 15.12816 0.087513
AOM 0.825195 0.599974 11.66610 0.073780
Eight quarters ahead out-of-sample Mean 0.852552 0.786239 14.70940 0.079648

square
(2014Q1 to 2015Q4) error
The second step was to evaluate the models

forecasting ability eight quarters ahead. Just
In that regard, this section concludes with
like in the other evaluations, the first step
the findings that the VECM, BVAR, and Phillip
is to visually inspect the movements of all
curve models fails to beat the benchmarks,
the forecasts against the actuals in the eight
particularly the AO, in forecasting inflation
quarter ahead forecasting period as shown in
for Swaziland, however the BVAR model did
the figure below. A closer look at the graph
beat the benchmarks in the eight quarters
shows that generally the forecasts track
ahead forecasts, albeit with only the RMSE
the movements of the actuals in the eight
measure. These results show that the BVAR,
quarter ahead forecasting period, however
when correctly specified, can be a suitable
all the models over-predicted inflation in
model for forecasting inflation in Swaziland.
the last four quarters as shown in the graph.
4.7.2Volume
Research Bulletin
Figure 7: Out-sample Forecasts Comparisons Forecast
2 Combination
Economic forecasters often have a variety of
however the BVAR model did beat the
11
Forecast Comparison Graph
different models and forecasts of the same
10
9
variable from which
benchmarks to choose.
in the eight quartersThese models
ahead forecasts,
and forecasts may differ in the underlying
albeit with only the RMSE measure. These results
8
6
assumptions, or may employ different
5 show that theTraditionally
information. BVAR, when correctly specified, can
the forecasting
4
3 decision was tomodel

be a suitable pick which single forecast
for forecasting inflation in
2
II III IV I II III IV I II III IV I II III IV I II III IV was “best” out of the individual forecasts
2011 2012 2013 2014 2015
Swaziland.
available. To test whether an average, or
ACTUAL VECM
combination, of the individual forecasts may

BVAR PHILIPS
TRIANGLE ARIMA
AOM Mean square error
perform better than

4.7.2 Forecast the individual forecasts
Combination
themselves. Bates and Granger (1969)
With visual inspection it is not very easy to introduced
Economic the idea that
forecasters oftena have
combination
a variety of
With visual inspection it is not very easy to
identify the model which tracks the actuals of forecasts outperforms any individual
identify
betterthe model
eight whichahead.
quarters tracks the
In actuals better
that regard, different models and forecasts of the same
forecast, as different models have their
usingquarters
eight the previously
ahead. stated
In thatcriterions and the
regard, using the variable
own from
merits. In which to choose.
this study the These models and
Combination
mean square error as an averaging method, Test of Chongmayand Hendry
previously forecasts differ (1986)
in theand refined
underlying
the tablestated criterions
below shows and the mean
conflicting square
results, by Timmermann (2006) was used. The idea
withas
error theanRMSE choosing
averaging the BVAR
method, whilebelow
the table the assumptions,
underlying this testoris that
mayif a single
employforecast
different
other measures chose the AO model. Based contains all information
information. contained
Traditionally the in the
forecasting
shows conflicting
on majority, weresults, withthat
conclude the RMSE
the AOchoosing
model other individual forecasts, that forecast will
the BVAR while the other measures chose the AO decision was to pick which single forecast was
103
model. Based on majority, we conclude that the “best” out of the individual forecasts available. To
AO model is the best model in forecasting test whether an average, or combination, of the
C E N T R A L B A N K O FResearch
S W A Z I LBulletin
A N D Volume
| RE2S E A R C H B U L L E T I N V O L U M E 2
curve with those from the triangle model Phillips lowest values of all the measures, followed by the
curve, and the benchmarks combined together. combination of the VECM and BVAR.
be just as good as a combination of all of the Table 15: Forecast Combination Evaluation
The figure below shows the comparison of the
forecasts. Table
Statistics 15: Forecast Combination Evaluation
forecasts combinations with the actual data in the Forecast
Statistics RMSE MAE MAPE Theil
In this study the forecasts were be

eight quarters ahead and the graph below shows
VECMBVAR 0.991313 0.914719 17.388 0.089734
combined in pairs to produce three forecast TRIANGLEPHILIPS 1.445551 1.106913 19.897 0.144445
that the forecasts
combinations. Thewere tracking
forecasts fromthe
theactuals,
VECM Forecast
AOARIMA RMSE
0.716811 MAE
0.621490 MAPE0.065879
11.887 Theil
were combined with those of the BVAR, those
except for the graph of the triangle and Phillips
Mean square error NA NA NA NA
from the ARDL Phillips curve with those from

curve combination
the triangle modelin Phillips
the firstcurve,
four and
quarters.
the From the results
VECMBVAR it is evident
0.991313 that17.388
0.914719 the entire
0.089734
benchmarks
However combined
by visual together.
inspection, The figure
the Phillips curve criterion gives figures which are less than
TRIANGLEPHIL
below shows the comparison of the forecasts those reported in the VECM, which confirms
combination was the best in the last four IPS 1.445551 1.106913 19.897 0.144445
combinations with the actual data in the that the BVAR produces better forecasts
quarters.
eight quarters ahead and the graph below than the VECM.0.716811
AOARIMA These results
0.621490further
11.887shows
0.065879
shows that the forecasts were tracking the that
Meanwhile the model is good for forecasting
square
actuals, except for the graph of the triangle earlier
error quarters fromNA the RMSE
NA andNA MAE, theNA
and Phillips curve combination in the first opposite is true for the MAPE and Theil.
four quarters. However by visual inspection,
the Phillips curve combination was the best 5.0
From CONCLUSIONS
the results it isAND
evident that the entire
in the last8:four quarters.
Figure Forecasts Combinations RECOMMENDATIONS
criterion gives figures which are less than those
Comparisons
The purpose of this study was to identify a
Figure 8: Forecasts Combinations reportedinflation
suitable in the VECM, which confirms
forecasting that the
model ideal
Comparisons forBVAR
small economies
produces betterlike Swaziland,
forecasts eight
than the VECM.
Forecast Comparison Graph
quarters ahead. This was to be attained
10 These results further shows that while the model
9
through evaluating the VECM and BVAR
8
is goodthe
against forARIMA
forecasting
and AO earlier
naïvequarters from the
benchmarks
7 and
RMSEascertain
and MAE, thewhich
oppositemodels forecast
is true for the MAPE
6
Swaziland inflation better eight quarters
5 and Theil.
ahead.
4
2 The study used quarterly data between

II III IV I II III IV I II III IV I II III IV I II III IV 5.0 Conclusions and Recommendations
2011 2012 2013 2014 2015 1990Q1 to 2013Q4 to estimate the model
ACTUAL
TRIANGLEPHILIPS
VECMBVAR
AOARIMA
The purposeand
coefficients of this studytowas2015Q4
2014Q1 to identify
to a
Mean square error
conduct
suitableforecasting exercises. The
inflation forecasting quality
model of for
ideal
the obtained forecasts was evaluated using
small
four economies
classical like Swaziland,
statistical eight Mean
loss functions: quarters
Again with visual inspection it is not very easy
to identify
Again theinspection
with visual model combinations which
it is not very easy to Absolute Error
ahead. This (MAE),
was to be Mean Absolute
attained throughPercent
evaluating
tracks the actuals better eight quarters Error (MAPE), the Root Mean Squared Error
identify the model combinations which tracks the the VECM
(RMSE), andandthe
BVAR against
Thiel’s the ARIMA The
Coefficient. and AO
ahead. In that regard, using the previously
actuals
stated better eightand
criterions quarters
the mean ahead.
squareInerror
that model
naïve which provides
benchmarks andthe smallestwhich
ascertain forecast
models
as an using
averaging method,stated
the criterions
table below error in the entire forecast horizon by all
regard, the previously and forecast Swaziland inflation better eight quarters
shows that the benchmark combination is the performance measures therefore was
the ahead. as the best model.
selected
themean
best square
model error as an averaging
in forecasting method,
inflation eight
quarters
the ahead, shows
table below as shown
that by the the lowest
benchmark
values of all the measures, followed by the When the models forecasting ability was
combination is the best model in forecasting The study in-sample,
evaluated used quarterly
thedata
AO between
model 1990Q1
was
combination of the VECM and BVAR.
inflation eight quarters ahead, as shown by the to 2013Q4 to estimate the model coefficients and
Page

found to be the best, with lowest values Bank of Swaziland should consider using the
of all the measures. Four quarters ahead BVAR, over and above the naïve benchmarks
forecasts evaluation selected the AO naïve in forecasting inflation. This conclusion is
benchmark as the best model. Results for similar to that of Doan, Litterman, and Sims
the eight quarter ahead forecasts were (1984), who found that BVAR performs better
mixed, with the RMSE selecting the BVAR than the unrestricted vector autoregression
while all the other measures selected the AO models.
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Five Years of Experience, Journal of Reality, Econometrica, 48, 1-48.
Business and Economic Statistics,
January 1986, Vol. 4, No. 1, pp. 25-38. Stock, J.H. and Watson, M. (2001). A
Comparison of Linear and Nonlinear
Norman, D. and Richards, A. (2010), Univariate Models for Forecasting
Modelling Inflation in Australia, RBA Macroeconomic Time Series, in
Research Discussion Paper No 2010-03. R.F. Engle and H. White (eds.),
Cointegration, Causality, and
Nxumalo, W. (2014). Understanding Forecasting: a Festschrift in Honour
the Conduct of Monetary Policy in of Clive Granger, Oxford: Oxford
Swaziland: An Internal Perspective, University Press.
Central Bank Of Swaziland Draft
Working Paper. (Unpublished). Stock, J.H. and Watson, M.W. (2002). Has
the Business Cycle Changed and Why?
NBER Macroeconomics Annual 2002,
159–218.

107
The Inflation Differential demand side, both fiscal and monetary

Between Swaziland policy were found to be relatively loose
relative to South Africa, exerting demand-
And South Africa - Revisited
driven inflationary pressures particularly
in the second half of 2016. Cognizant of
Welcome N. Nxumalo15
the trade-off between nominal and real
convergence, the paper recommends that
Abstract
inflation differential be incorporated in the
Central Bank’s reaction function especially
Inflation differentials within a currency
in times of positive inflation differential.
union is a concern for policy makers as it
may lead to misalignment of real interest
Key words: PPP Theory, inflation differential,
and real exchange rates which can raise
B-S Effect
questions on the appropriateness of
pursuing a common monetary policy and
to some great extent it determines the 1.0 INTRODUCTION
long-run viability of a currency union. This Theoretically, under an optimum currency
paper studies inflation differential between area; there is high integration of labour,
Swaziland and South Africa mainly focusing product and capital markets and there is
on recent differential observed in the year thus an expectation of equalization of prices
2016. A test for relative PPP to test for within a currency union. According to Braun
convergence between the two countries’ (2010) the convergence in prices is also
prices is tested using a Generalized Error expected due to the elimination of exchange
Correction model. The results for a sample rate risks, transaction costs and border
period of 1993 to 2016 (monthly data) show effects as well as the pursuit of common
that relative PPP holds between the two monetary policy. In practise, however, such
countries with a long-run coefficient of 1.1, presumptions fail to hold Ridhwan (2015). As
a contemporaneous pass-through effect of a result, understanding causes of inflation
51.7 per cent and an adjustment rate of 7.8 differential within a monetary union set-up
per cent. These coefficients are higher for has been one of the popular research areas
most recent periods. particularly in the European Monetary Union
(EMU) in recent years (such as; Haan, 2010,
The paper also studies the selected trends Rabanal, 2008 and Braun, 2010). Inflation
of the CPI components to make inferences differentials within a currency union is a
from both supply side and demand side concern for policy makers as it may lead
inflation. From this analysis it is concluded to misalignment of real interest and real
that even though Swaziland faced a similar exchange rates which can raise questions on
supply shock as South Africa in 2015/16, the appropriateness of pursuing a common
which was the El-nino-induced drought, monetary policy and to some great extent
the results and the adjustment mechanism determines the long-run viability of a
to this shock were asymmetric. From the currency union.
Swaziland is part of a currency union – the

Common Monetary Area (CMA) with tight
geographic and economic links between
Welcome Nxumalo is an Senior Economist, Policy
15
Swaziland and South Africa. It is a general
Research, in the Policy Research and Macroeconomic expectation that whatever happens in South
Analysis at the Central Bank of Swaziland.,reachable
Africa spills over to Swaziland especially
at Welcomen@Centralbank.org.sz.
in terms of economic developments. For

example, when economic growth slows in Africa inflation. Inflation developments

South Africa, it affects demand for Swazi and its dynamics evolve over time and the
exports (to South Africa) which are about 65 implications therefrom vary. The purpose
percent of the total and thus hampers growth of this paper is to investigate the reason
in the domestic economy. With about 90 for divergences in inflation trends between
percent of total Swazi imports coming from Swaziland and South Africa focusing on
or through South Africa, price developments recent divergences observed in 2016. This
in South Africa has a significant impact on would be done at two levels (i) economic
domestic inflation developments through theory – mainly testing the purchasing power
what can be termed as ‘high degree of parity between Swaziland and South Africa’s
imported inflation’. With the exchange rate, consumer prices; (ii) Subcomponents analysis
fixed on a one-to-one basis economic theory covering methodological issues such as the
postulates that, based on a purchasing role of weights in calculation of the consumer
power parity hypothesis (PPP), Swaziland’s price index (CPI) and unpacking supply side
price movements should be similar to those and demand side inflation movements.
of South Africa and any differential have Implications of inflation differentials on
implications for competitiveness of the monetary policy are also unpacked.
country relative to South Africa on the basis
of real exchange rate movements. 2.0 REVIEW OF LITERATURE
According to Haan (2010) there are several
When the relative PPP holds, it supports factors that explain the size and dynamics
harmony in monetary policy formulation and of inflation differentials within a currency
implementation especially for Swaziland board. The factors which are not mutually
within the context of the Common Monetary exclusive include: ‘catch-up’ mechanism;
Area (CMA) wherein Swaziland has limited business cycle differences, asymmetric
discretion for her monetary policy as its policy demand and supply shocks and or asymmetric
making is linked to that of the monetary adjustment mechanism to common shocks;
union anchor, South Africa. Divergences in characteristics of domestic product; labour
inflation outcomes for Swaziland and South and other factor markets and wage and
Africa can complicate monetary policy for price rigidities. This section however covers
Swaziland. For example, if South African a brief overview of theories that have been
inflation is on a downtrend and Swaziland’s studied extensively in explaining inflation
is on an upward trend, then South Africa has differential among countries. These are;
space to pursue an accommodative monetary the purchasing power parity hypothesis and
policy but the Swaziland monetary policy the Balassa-Samuelson effect which mainly
would be a bit complicated. That is because focuses on ‘catch-up’ mechanism.
even though they would like to pursue a
contractionary policy to fight inflation, they 2.1. The Purchasing Power Parity
need to be mindful of the South African Hypothesis
policy whose stance has a stronger barring In the post-First World War, the Purchasing
on Swaziland’s policy given the CMA set up of Power Parity (PPP) emerged as the first
capital mobility and a fixed exchange rate. attempt to determine a country’s equilibrium
exchange rate with the notion that exchange
Considering the tight economic links and the rates tend to equalize relative price levels
implication of inflation differential between in different countries (Dedu & Dumitrescu,
Swaziland and South Africa for monetary 2010). As noted by Taylor & Taylor (2004)
policy, it is of constant interest to study the the PPP approach emanate from ‘the Law
differential between Swaziland and South of One Price’ (LOP) which states that any

109
ed market has states
emanate from South
that‘theany LawAfrica.
if commodity
of OneEmpirical Price’ in a(LOP) unified tests
which as Swaziland’s
market noted
has likeby
inflation should Africa.
South move inEmpirical tandem with tests that ofnoted by
the PPP approach
equalize
rate equalize
ratewithwithrelative
the
that
thenotion relative
notion price
that
relativelevels
thatprice levels rates
exchange
exchange
PPP
in intend
rates
holds
tend different
different toto
then
Equation board
board
Equation 2like
2reflects the CMA
the
reflects CMA
that
thatin where
where
ina acase the
case theofofexchange
aexchange
acurrency
currency raterate is asis
ation (LOP) can states that any
becountries commodity in a unified
Wickremasinghe (2004) market
on has
relative Southhave
PPP Africa. Empirical tests as noted by
Price’ which
equalize
equalize
a single relative inflation
(Dedu
relative
price. price
The
should
& Dumitrescu,
price levels
levels
LOP move specification
2010).
inin in
different tandem
As
different noted can with bethat
pegged ofWickremasinghe
on aCMAone to one basis it(2004)
shouldrate be on theisrelative
case PPP have
countries (Dedu & Dumitrescu, 2010). As noted board board
pegged like
liketheon the aCMAone where
towhere
one the theexchange
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it should rate
beisthe case
a single by Taylorprice.
yielded &&The weak LOP
C E N(2004)
TR specification
support
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S W A Zbe
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|floating R relative
E S E A R C HPPP (2004) L E T Ion
B U Lholds N thenV relative M E 2 PPP have
O L USwaziland’s
unified market
bycountries
written
has
countries
Taylor (Dedu &(Dedu Taylor
as:
South &Taylor
Dumitrescu, Africa.
Dumitrescu,
(2004) the
Empirical
2010).
2010).
PPPAsAs
PPP noted
approach
tests
noted as
pegged noted
pegged
that on on if by
ifa aone
yielded
one
relativetotoone
onePPP weak
basis
basisit support
itshould
holds should be
thenbetheespecially
the case
case
Swaziland’s
under floating
written emanateas: from ‘the(2004) Law of One Price’ (LOP) yielded weak support especially under floating
ecification can be &exchange Wickremasinghe rate regimes (2004) but on which
consistent relative inflation
results
PPP have
have should
exchange move ratein tandem withconsistent
that of
..........Equation byby
emanate Taylor
Taylorfrom&‘the Taylor
Taylor
𝑃𝑃𝑖𝑖 = Law (2004)
𝐸𝐸𝐸𝐸of∗ 𝑖𝑖One
thethePPP
Price’ PPP approach
(LOP) approach which that
..............................................Equation
that ifif relative
inflation relativeshould PPP
PPP holds
move holds inregimes
then
then
tandem but
Swaziland’s with that of results have
Swaziland’s
states
𝑃𝑃𝑖𝑖 from = that𝐸𝐸𝐸𝐸 any ∗ Law commodity in a unified market
which has
exchange
South Africa.rate regimes
Empirical buttests consistentas that notedresults
ofof by
have
emanate
emanate from yielded
surfaced
‘the
‘the 𝑖𝑖 ..............................................Equation
Lawofweak in
ofOneOne support
cases
Price’
Price’ (LOP)
(LOP) especially
whereby which the under
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inflation floating
adjustment should
should move
move
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with whereby that the adjustment
states
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adjustment by
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South surfaced
Wickremasinghe
16. Africa.
Africa. in
Empiricalcases
(2004)
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on relative
tests asas noted the PPP adjustment
have
price.
...................Equation
a single The price. process
LOP
exchange
Thespecification isLOP
rate
depicted regimes
can
specification in abe but consistent
non-linear
written
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process
Wickremasinghe
haveprocess
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by
PPP
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good 𝑖𝑖as: in the written
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single price. as:
price. 𝑃𝑃 and 𝑃𝑃 ∗
are the prices of good 𝑖𝑖 in yielded
process
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a non-linear under form floating
16.
𝑖𝑖The
surfaced The LOP LOP 𝑖𝑖inspecification
specification
cases whereby cancan be be theWickremasinghe
Wickremasinghe
adjustment (2004) (2004) on on relative
relative PPP PPP have have
∗
Whereas:
written 𝑃𝑃𝑖𝑖 and 𝑃𝑃2.2. 𝑖𝑖 are The theBalassa-Samuelson
prices of good 𝑖𝑖 in the Effect yielded
exchange weak rate support
2.2.
regimes The especially
Balassa-Samuelson
but consistent under
results floatingEffect
written
written
E is home as:as:𝑃𝑃𝑖𝑖 and ∗
foreign economy 2.2.
yielded
yielded
E. isweak The
weak Balassa-Samuelson
support
supportespecially
especiallyunder under Effect floatinghave
floating
ively, and =
process 𝐸𝐸𝐸𝐸 is depicted in respectively,
𝑖𝑖 ..............................................Equation
a non-linear form and 16 2.2. The Balassa-Samuelson Effect
es of good home
𝑖𝑖 in𝑃𝑃and
the= foreign ∗ economy respectively, and E is The exchange
surfaced rate
Balassa-Samuelsonin regimes
cases but consistent
whereby effect the results
isadjustment
typically have
𝐸𝐸𝐸𝐸 ∗𝑖𝑖 ∗ ..............................................Equation exchange
exchange rate
rateregimes
regimes but
butconsistent
consistent results
results have
haveis typically used to
estic currency1 𝑖𝑖the 𝑃𝑃𝑖𝑖𝑃𝑃𝑖𝑖== nominal
The
𝐸𝐸𝐸𝐸
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𝑖𝑖..............................................Equation
..............................................Equation currency used to The Balassa-Samuelson effect
2.2. The Balassa-Samuelson Effect used Theto explain inflation thedifferential for to
1 the nominal
E is 𝑃𝑃 exchange rate (domestic currency surfaced Balassa-Samuelson
in cases effect is typically used
process ininis depicted in awhereby
non-linear the
form adjustment
16 .
spectively, 1and
1 Where ∗ surfaced
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cases whereby
whereby the adjustment
adjustment
ame basket of priceexplain of
𝑖𝑖 foreign
and 𝑃𝑃 are
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𝑖𝑖 currency).
the prices If the same
of
differential good 𝑖𝑖 in
for basket
the countries
countries of facing explain
facing inflationprocess.
catch-up differential Accordingfor countries facing
domestic price currency of foreign The currency).Balassa-Samuelson If the sameeffect basket is of process
typically process
processexplain
isis
2.2.
used isThe
depicted depicted
inflation
depicted
to inin a a in a non-linear
differential
non-linear
non-linear
Balassa-Samuelson form
formfor
1616form
.
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16.
countries facing
Where
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Where home
𝑃𝑃
goods
𝑃𝑃 and
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and
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∗foreign
costs ∗ ∗arethe
𝑃𝑃 are are
are the
theeconomy
thetheprices
same
prices
pricesprices respectively,
when
ofof
of good
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good
𝑖𝑖 𝑖𝑖𝑖𝑖
in in
in and
theare
thethe
in is to Balassacatch-up
Econverted (1964) process. and Samuelson According (1964)
to Balassa (1964)
are converted goods
𝑖𝑖
costs 𝑖𝑖 𝑖𝑖 catch-up
the
𝑖𝑖
same process.
𝑖𝑖 𝑖𝑖
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are converted to Balassa (1964)process. According to Balassa (1964)
catch-up
he samethe basket
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nominal explain
foreign exchange inflation
economy rate differential
respectively,
(domestic for
currency as
countries 2.2. quoted
2.2.
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2.2.
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Balassa-SamuelsonCoudert
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Effect
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to and foreign
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common economy
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currency, respectively,
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ices are converted price of catch-up
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of (1964)
explain inflation differential for countries
thethethe nominal
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nominal
power exchange
exchange
exchange
parity (APPP)rate
rate(domestic
rate (domestic
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prevails. currency
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increase
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more (2004) quickly effect
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typically
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development process,
ever, the currency
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goods
price (2004)
costs (APPP) ofthe
foreign
same during
prevails. when
currency).
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However,
prices are
If the
development
the
convertedAPPP process,
(2004)
catch-up during
process. the
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to Balassa (1964) process,
bsolute purchasing price
price of of foreign
foreign and currency).
currency).Samuelson If If thethe (1964)
same
same basket as quoted
basket of of by Coudert
sector
explain
explain than
inflation
inflation in the
differential
differential non-tradeable
forfor countries
countries (services)
facing
facing
price of
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basket
tends to currency).
goods
be vested costsIf the on the same same
unrealistic basket when of
assumptions explain inflation productivity differential tends for countriesmore
tomore
increase facingquickly in the
cHowever,
assumptions tends
the to
APPPto common be vested
productivity
(2004) currency, on unrealistic
tends
then
during to
absolute
the assumptions
increase purchasing
development more quickly productivity
sector.
and inGiventhe
Samuelson
process, tends
that (1964)tothe increase
as prices
quoted ofby (1964) in the
quickly
tradable
Coudert
prices
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goods
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costscosts converted
the
the
the same
same
samewhen when
when to common
prices
pricesare
prices are currency,
areconverted
converted
converted
catch-up
catch-up
catch-up
process.
process.According
process.
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Balassa(1964)
to Balassa
such
power as
parity (i) free
(APPP) trade
prevails. (no barriers
However, to
the trade),
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goods all are tradable
set by goods
international sector than
competition, in(1964)
the non-tradeable
olistic
trade), thensuch
(ii)
assumptions all absolute
as
totocommon
common (i) free tradable trade
currency,
currency,
productivity purchasing (no
goods
then
then barriers
tendssector
absolute
absolute power
to thanparity
topurchasing
trade),
purchasing
increase in(ii) the
more all and and(2004)
tradable
non-tradeable
quickly in the goods
Samuelson
Samuelson during
(1964)
(1964) the
sector development
than inbyby
asas quoted
quoted the Coudert
Coudert process,
non-tradeable
to common
(APPP) prevails.
goods
tends
currency,
be However,
being
totradeable vested
then absolute
tradeable on (iii) the and APPP
unrealistic
purchasing
(iii) tends
that
assumptions to
domestic anandandincrease
Samuelson
productivity
in productivity
(services)
tends
(1964) as quoted
to sector.
increase Given
more
in quickly
this
that by sectorCoudert
the prices of tradable
intradable
the
ersdomestic
to trade), goods
power(ii)being
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(APPP)
(services)
tradable prevails. and
prevails.
sector.
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However,
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that
than APPP
APPP
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in the and
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(2004)
of(services)
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increase Given
developmentthat
development
in the
wages, prices
process,
process,
which of is
be
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trade), APPP as all (2004)
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osed of(i)
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tends goods
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by trade),
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international
assumptions (ii) theall prices of tradablean
competition,
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commodities tradeable with and (iii)
identical that domestic
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increase sector.
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ese limitations relative
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PPPdetrimental PPP where
competitiveness. productivity
competitiveness. Since this has
Since notthis
increase grown in at
increase
wages
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Bulletin Volu
Relative PPPacross
foreign
commodities
commodities countries.
pricecompetitiveness.
indices
with
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toin
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ininthis
this is
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competition,
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relative PPP the pace. that the price index
used. Relative prevails prevails
PPP
relative if the PPP if
ratio theofratio
theory twoisoftheseof theory
broadly
often two Since
used. broadly is
defined
Relative
often
this defined price price
increase spreads
inan
in the wages prices spreads
across of the across
domesticeconomy the
goods economy
as arelative
whole, as a whole,
there
to thoseis a there is a
defined commodities
used.across
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Relative countries. with
spreads In
PPP prevails identical
In light
light
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oadly defined indicesprice stays
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after(∆𝑃𝑃𝑡𝑡−1 ∗ ) +∗ (∆𝐸𝐸𝑡𝑡 /
𝑡𝑡 /∆𝑃𝑃 𝑡𝑡−1 )for
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sectors,
Equation there
2 is an increase
+ 𝑡𝑡(∆𝐸𝐸𝑡𝑡 /in 𝑡𝑡−1
the exchange rate. This can be presentedEquation
𝐸𝐸 )................................................................
𝑡𝑡−1 as domestic
sector,
2
(*); where productivity
and abroad (*); has not grown at the betwe
(∆𝑃𝑃 𝐸𝐸𝑡𝑡−1 )................................................................
∗∗ ∗∗ Equation 2 average
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𝑡𝑡 /𝑃𝑃 /𝑃𝑃
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𝑡𝑡−1 ) )==(∆𝑃𝑃
𝑡𝑡−1
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(∆𝑃𝑃𝑡𝑡 /∆𝑃𝑃𝑡𝑡 /∆𝑃𝑃𝑡𝑡−1
domestic
𝑡𝑡−1) )++(∆𝐸𝐸 (∆𝐸𝐸 𝑡𝑡 /𝑡𝑡 /
inflationinflation ) is same pace.
(∆𝑃𝑃/𝑃𝑃𝑡𝑡−1(∆𝑃𝑃/𝑃𝑃 Given that the price index is an expres
𝐸𝐸𝐸𝐸 This states that domestic
)................................................................
)................................................................
Equation
Equation 22 𝑡𝑡−1 ) is 𝑡𝑡−1𝑝𝑝)𝑡𝑡 =is𝛼𝛼𝛼𝛼𝑡𝑡 + (1 − 𝛼𝛼)𝑝𝑝𝑡𝑡 ………………… Equation 3
𝑇𝑇 𝑁𝑁𝑁𝑁
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𝑡𝑡−1 This that that
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average of these two sectors, there is an increase
ation
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𝑡𝑡−1equal equal to the
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sumsum ofofforeignforeign foreign inflationinflation
(∆𝑃𝑃 𝑡𝑡 / 𝑡𝑡 /
This
Thisstates statesthat thatdomestic
domesticinflation inflation(∆𝑃𝑃/𝑃𝑃 (∆𝑃𝑃/𝑃𝑃 ) ) isis ∗
𝛼𝛼 ∗ 𝑝𝑝𝑡𝑡𝑇𝑇∗162006 )𝑝𝑝𝑡𝑡𝑁𝑁𝑁𝑁∗
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𝑡𝑡−1
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nlation
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(∆𝐸𝐸𝑡𝑡 /𝐸𝐸
Equation 2 𝑡𝑡−1 evidence for PPP produ
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currency
and ofof currency
foreign
foreign depreciation
depreciation (∆𝐸𝐸
depreciation
inflation
inflation (∆𝑃𝑃
(∆𝑃𝑃 ∗𝑡𝑡 /𝐸𝐸
∗ 𝑡𝑡−1(∆𝐸𝐸
). 𝑡𝑡 /𝐸𝐸𝑡𝑡−1Carolina,
). 2006 Carolina, 2006
shows that showsforthat
evidence PPPevidence
to hold is for PPP to hold is
𝑡𝑡 /𝑡𝑡 /
𝑡𝑡−1
weaker when a linear relationship is assumed.
iation
n (∆𝐸𝐸𝑡𝑡(∆𝐸𝐸
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Central ∗). ).. that
16
16
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2006 showsthat in/𝐸𝐸/𝐸𝐸
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𝑝𝑝𝑡𝑡𝑇𝑇shows tradea
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∆𝑃𝑃
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Swaziland © 2018 © that(∆𝑃𝑃/𝑃𝑃
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(∆𝐸𝐸
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Carolina, 2006 denotes
showsthat the price
thatevidence
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|
125 |
of a currency weaker when a linear relationship is assumed.
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𝑁𝑁𝑁𝑁
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125 |
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125
P∗Pa ag ge e
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∆𝑃𝑃 𝑡𝑡−1it should
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(∆𝐸𝐸𝑡𝑡 /𝐸𝐸𝑡𝑡−1 ).
16
denotes the shows
Carolina, 2006 share
that of traded
evidence goods
for PPP in each
to hold is countr
PPP holds then Swaziland’s inflation should weaker when a linear relationship is assumed.
country. The real exchange rate is given by:125 | Samue
move in tandem with that of South Africa.
Page explai
Empirical tests as noted by Wickremasinghe 𝑞𝑞𝑡𝑡 = (𝑒𝑒𝑡𝑡 − 𝑝𝑝𝑡𝑡∗ ) − 𝑝𝑝𝑡𝑡 .....……………............Equation 5
(2004) on relative PPP have yielded weak EU (s
support especially under floating exchange Carolina, Mileti
Where 𝑒𝑒𝑡𝑡2006 shows that evidence forrate
PPP expressed
to hold
16
is the nominal exchange
rate regimes but consistent results have is weaker when a linear relationship is assumed
in units of domestic currency per unit of foreign
3. Em
currency.
Given
Given the tradeable and non-traded goods an differe

expression of movements in relative prices in
terms of productivity differentials between
paper
betwe
𝑇𝑇 𝑇𝑇(1 𝑁𝑁𝑁𝑁 𝑁𝑁𝑁𝑁 expressed
expressed
expressed as
as aaassum suma sum of
of the of the
the nominal
nominal nominal exchange
exchange
exchange rate
raterate
𝑝𝑝𝑝𝑝𝑡𝑡𝑡𝑡 =
𝑝𝑝𝑡𝑡𝛼𝛼𝛼𝛼
= 𝛼𝛼𝛼𝛼 +
=𝑡𝑡𝑡𝑡𝑇𝑇𝛼𝛼𝛼𝛼 +−
+𝑡𝑡 (1 (1𝛼𝛼)𝑝𝑝
− 𝑡𝑡𝑡𝑡𝑁𝑁𝑁𝑁…………………
− 𝛼𝛼)𝑝𝑝
𝛼𝛼)𝑝𝑝 Equation
𝑡𝑡 …………………
………………… 33 3
Equation
Equation
(*);
(*);
(*);(*); between
between
between between domestic
domestic
domestic domestic country
country
country country and
and
and abroad
abroad
and abroad abroad would
would
would would be
bebe b
depreciation
depreciation
depreciation and
andand the
thethe weighted
weightedweighted average
averageaverage of
of of the
thethe
∗∗ ∗ ∗∗𝑇𝑇 𝑇𝑇∗ 𝑇𝑇∗(1 − 𝛼𝛼 ∗𝑁𝑁𝑁𝑁 𝑁𝑁𝑁𝑁∗ expressed asas aaaLas
sum of the of nominal exchange rate
𝑝𝑝𝑝𝑝
𝑝𝑝𝑝𝑝𝑝𝑝
=
𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡=
=𝑝𝑝=
= 𝛼𝛼𝛼𝛼=
𝑝𝑝𝑡𝑡𝛼𝛼𝛼𝛼
𝛼𝛼𝛼𝛼 C𝑡𝑡𝑝𝑝
𝛼𝛼𝛼𝛼= 𝑝𝑝
𝑇𝑇
E +
𝛼𝛼𝛼𝛼
∗ +
𝛼𝛼𝑇𝑇𝑡𝑡N𝑡𝑡𝑇𝑇∗
+ T𝑝𝑝(1
+ +R𝑇𝑇
(1𝑡𝑡(1 A(1
+ −L
−+− (1 (1
𝛼𝛼)𝑝𝑝
B− A 𝛼𝛼
𝛼𝛼)𝑝𝑝
𝛼𝛼)𝑝𝑝
−N− K )𝑝𝑝
∗𝑁𝑁𝑁𝑁
)𝑝𝑝
𝑁𝑁𝑁𝑁
𝛼𝛼)𝑝𝑝
∗ 𝑁𝑁𝑁𝑁∗
𝑡𝑡𝑡𝑡𝑁𝑁𝑁𝑁∗
𝛼𝛼O…………………F)𝑝𝑝
………………… 𝑁𝑁𝑁𝑁
S𝑡𝑡W …………A Z…………
………… Equation
D Equation
I L A Equation
Equation
N
Equation | 34 expressed
expressed
34R3E S4E3A R C Hproductivity L E T I Nas
B U Lexpressed VO sum
Usum
growth MaEsum of the
2ofdifferentials
the nominal
nominal
the nominal exchange
exchange
betweenexchange rate
ratera
the
𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡
𝑡𝑡 𝑡𝑡 ………………… 𝑡𝑡 ………………… Equation
Equation productivity
productivity growth growth differentials
differentials between
between thethe
depreciation
depreciation
depreciation
depreciation and
and
and the
the
and thethe weighted
weighted
weighted weighted average
average
averageaverage of
of the
of ofthe
theth
𝑇𝑇𝑇𝑇 𝑇𝑇 tradeable
tradeable
tradeable and
andand non-tradeable
non-tradeable
non-tradeable goods
goods goods sector
sectorsector of
of the of the
the
𝑝𝑝Where
∗ Where
𝑡𝑡𝑡𝑡∗ 𝑡𝑡∗=
𝑝𝑝Where
𝑝𝑝 == 𝑝𝑝𝛼𝛼 ∗ ∗∗𝑝𝑝
𝛼𝛼 𝛼𝛼 =
𝑝𝑝∗𝑝𝑝𝑡𝑡𝑡𝑡𝑇𝑇∗
𝑝𝑝 𝑝𝑝 𝑇𝑇∗
𝛼𝛼
denotes
𝑝𝑝∗+
denotes
𝑇𝑇∗ + 𝑝𝑝
𝑡𝑡 + denotes
(1
𝑇𝑇∗
(1 (1 + −− −(1
the
𝛼𝛼
the
𝛼𝛼 𝛼𝛼
∗∗ ∗the
−)𝑝𝑝
)𝑝𝑝
price
)𝑝𝑝
𝑁𝑁𝑁𝑁∗
price
𝑁𝑁𝑁𝑁∗
𝛼𝛼 ∗ price
𝑁𝑁𝑁𝑁∗
)𝑝𝑝 …………of
𝑁𝑁𝑁𝑁∗
…………of
…………
traded
of
traded
………… traded
Equation
Equation
goods
Equationgoods goods
Equation 4 4 4
and
and 4and productivity growth differentials 𝑁𝑁𝑁𝑁 𝑁𝑁𝑁𝑁 between the
𝑡𝑡 𝑡𝑡
𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡 productivity
productivity
domestic productivity country growth
growth growth
(∆𝑎𝑎 differentials
𝑇𝑇 differentials
between
between the
theth
𝑡𝑡𝑡𝑡𝑇𝑇 −
𝑇𝑇∆𝑎𝑎
𝑝𝑝𝑝𝑝𝑡𝑡𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑝𝑝denotes
𝑁𝑁𝑁𝑁
denotes the the price price of non-traded
of non-traded goods goods 𝛼𝛼 𝛼𝛼 domestic
domestic country country (∆𝑎𝑎 (∆𝑎𝑎 − 𝑡𝑡 ∆𝑎𝑎 ∆𝑎𝑎))𝑡𝑡 and
−𝑡𝑡𝑡𝑡𝑁𝑁𝑁𝑁 ) and
and that
that thatof
of the
of
thethe
𝑡𝑡 denotes the price of non-traded goods 𝛼𝛼 3.0tradeableEMPIRICAL and STRATEGY
non-tradeable goods sector of
ofofthe
𝑡𝑡
Where
Where 𝑝𝑝𝑝𝑝𝑝𝑝 𝑇𝑇 𝑇𝑇 𝑇𝑇
denotes
𝑡𝑡𝑡𝑡𝑇𝑇𝑡𝑡denotes the
the price price of oftradedtraded goodsgoods and
andand country tradeable
tradeable
tradeable and
andand
abroad non-tradeable
non-tradeable
non-tradeable
(∆𝑎𝑎 𝑇𝑇∗ 𝑇𝑇∗ 𝑁𝑁𝑁𝑁∗ goods
goods goodssector
sector sector the
the
of th
Where
Where Where denotes
denotes
𝑝𝑝𝑡𝑡 denotes the
the price
the price price ofof traded
traded
of traded goods
goods goods and 𝑡𝑡𝑡𝑡𝑇𝑇∗ − ∆𝑎𝑎 ). The Balassa-
𝑁𝑁𝑁𝑁∗
denotes the share of traded goods in each country
country abroad abroad (∆𝑎𝑎 (∆𝑎𝑎 − −
∆𝑎𝑎 𝑡𝑡𝑡𝑡𝑁𝑁𝑁𝑁∗
∆𝑎𝑎 ). ).
The The Balassa
Balassa-
denotes denotes the the share share of oftraded traded goods goods in ineach each Given the theoretical background 𝑡𝑡
𝑇𝑇𝑇𝑇𝑇𝑇 𝑇𝑇 𝑁𝑁𝑁𝑁 on
𝑡𝑡 inflation
domestic
domestic country
country (∆𝑎𝑎
(∆𝑎𝑎 −−∆𝑎𝑎 𝑡𝑡𝑡𝑡𝑁𝑁𝑁𝑁 𝑁𝑁𝑁𝑁)) )and
𝑁𝑁𝑁𝑁 that of the
domesticdomestic country country (∆𝑎𝑎 𝑡𝑡𝑡𝑡(∆𝑎𝑎 𝑡𝑡− ∆𝑎𝑎
∆𝑎𝑎
− ∆𝑎𝑎 𝑡𝑡and
and) andthat
that ofofand
that the
the
of th
𝑁𝑁𝑁𝑁
𝑝𝑝𝑝𝑝𝑝𝑝
𝑡𝑡𝑡𝑡𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁denotes
denotes𝑁𝑁𝑁𝑁
𝑝𝑝denotes the
the price
price of
ofofratenon-traded
non-traded goods
goods 𝛼𝛼 𝛼𝛼 Samuelson
𝛼𝛼𝛼𝛼 differential Effect has been 𝑡𝑡widely used to try
and 𝑡𝑡 denotes denotes thethe price
the price price non-traded
of ofnon-tradednon-traded goods goods particularly in monetary unions,
Samuelson Effect has been 𝑡𝑡widely used to try and
country. 𝑡𝑡 country.
country. TheThe The real
realreal exchange
exchange exchange raterate is given
is given is given by:
by:by: Samuelson Effect has been
𝑇𝑇∗
widely
𝑁𝑁𝑁𝑁∗
used to try and
goods denotes the share of traded goods country
country
theexplainpaper abroad
abroad
will study (∆𝑎𝑎
(∆𝑎𝑎 𝑇𝑇∗ 𝑇𝑇∗ − ∆𝑎𝑎
𝑇𝑇∗
−−𝑡𝑡∆𝑎𝑎 𝑁𝑁𝑁𝑁∗ 𝑁𝑁𝑁𝑁∗ ).
∆𝑎𝑎).). The
𝑁𝑁𝑁𝑁∗The Balassa-
Balassa-
denotes the share of traded goods in in each country country abroad
inflation abroad (∆𝑎𝑎 𝑡𝑡𝑡𝑡(∆𝑎𝑎
differentials 𝑡𝑡price ∆𝑎𝑎
−𝑡𝑡𝑡𝑡and 𝑡𝑡particularly inflation
The
). The Balassa-
in Balass
denotes
denotes denotes thethethe share
share share ofof traded
traded
of traded goods
goods goods in each
each
in each explain
explain inflation
inflation differentials
differentials 𝑡𝑡particularly
particularly in the in
thethe
in
𝑞𝑞 each
= (𝑒𝑒
𝑞𝑞𝑡𝑡 (𝑒𝑒 =𝑡𝑡𝑡𝑡 The −
(𝑒𝑒 country. 𝑝𝑝 ∗ ∗ ) − ∗ ) 𝑝𝑝 The real
.....……………............Equation exchange rate 5 is differential
Samuelson between
Effect has Swaziland
been widely andused South
to try and
𝑞𝑞country.
𝑡𝑡𝑡𝑡 =
country.
country. −The 𝑡𝑡𝑝𝑝− 𝑡𝑡𝑡𝑡real𝑝𝑝−
)real 𝑡𝑡 𝑝𝑝 −
exchange 𝑝𝑝𝑡𝑡 .....……………............Equation
𝑡𝑡𝑡𝑡 .....……………............Equation
rate is
isisgiven by: 5 5 Samuelson
EUSamuelson
Samuelson
(see. Effect
Effect
Milhaljek, Effecthas been
has2002;
has been beenwidely
widely
Coudert, widely used
used tototry
used
2004) toand
try and andan
try
given country.by:The real
The exchange
real exchange exchange rate
raterate given
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by: by: Africa EU EU (see.
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Milhaljek, fronts. 2002; 2002;
First, Coudert, Coudert,
it tests 2004) 2004)
the andand
explain
explain
explain explain inflation
inflation
inflation
inflation differentials
differentials
differentials
differentials particularly
particularly
particularly
particularly in
ininthethe
the
in th
purchasing
Miletic, power
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𝑞𝑞Where
Where
𝑞𝑞𝑞𝑞𝑡𝑡𝑡𝑡 𝑡𝑡=== Where (𝑒𝑒
𝑞𝑞(𝑒𝑒 (𝑒𝑒 =
𝑒𝑒𝑒𝑒−
𝑡𝑡 𝑡𝑡
− 𝑡𝑡 (𝑒𝑒
−
is𝑒𝑒
is𝑝𝑝
𝑝𝑝
∗∗the
𝑝𝑝
𝑡𝑡
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∗
) −
) − the
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nominal
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∗𝑝𝑝
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) 𝑝𝑝
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exchange
.....……………............Equation
.....……………............Equation exchange
.....……………............Equation
𝑝𝑝 .....……………............Equation
rate
rate rateexpressed
expressed
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𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡 𝑡𝑡 term EU
EUEUand (see.
(see.
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Milhaljek,
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(see. Milhaljek, term2002;
Milhaljek, 2002; dynamics.
2002; 2002; Coudert,
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Coudert, 2004)
2004)
2004) 2004) and
and andan
in
in units in units
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is the
𝑡𝑡theis nominal
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currency.
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expressed
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Power it itParity
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given
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study Swaziland
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to to study
study the the long-term
long-term and and short short term term dynamics
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traded
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2
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power
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parity pari
of
𝑝𝑝 𝑁𝑁𝑁𝑁
−𝑁𝑁𝑁𝑁 𝑝𝑝 𝑇𝑇𝑇𝑇 𝑇𝑇
= 𝑐𝑐 + (
𝛿𝛿𝛿𝛿 𝛿𝛿𝑇𝑇
) 𝑎𝑎 − 𝑇𝑇𝑎𝑎 𝑁𝑁𝑁𝑁
………...Equation
𝑁𝑁𝑁𝑁 6 Secondly
Secondly the the paper paper will will study study the the sources
sources of o
given
𝑝𝑝
given
given
𝑁𝑁𝑁𝑁 𝑝𝑝 −
given asas 𝑝𝑝 − follows:
asfollows: 𝑝𝑝
=
follows: 𝑐𝑐
as follows: = + 𝑐𝑐 ( + ) ( 𝑎𝑎 𝑇𝑇
) 𝑎𝑎
− 𝑎𝑎−𝑁𝑁𝑁𝑁 𝑎𝑎 ………...Equation
………...Equation 6 6 to Power
provides
study the Parity
a basis
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𝛾𝛾𝛾𝛾 𝛾𝛾 provides
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𝑁𝑁𝑁𝑁 𝑇𝑇𝑇𝑇 𝑇𝑇𝑇𝑇 𝑁𝑁𝑁𝑁𝛿𝛿𝛿𝛿𝛿𝛿𝑁𝑁𝑁𝑁𝑇𝑇𝑇𝑇𝛿𝛿𝑇𝑇 𝑇𝑇𝑁𝑁𝑁𝑁 noted by
Secondly
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will (2004)
willwill studymost
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pri
𝑝𝑝Where
Where𝑝𝑝𝑁𝑁𝑁𝑁
𝑝𝑝Where 𝑁𝑁𝑁𝑁− −−
𝑝𝑝
Where 𝑁𝑁𝑁𝑁𝑝𝑝𝑝𝑝𝑎𝑎𝑎𝑎
𝑝𝑝𝑇𝑇− 𝑇𝑇= and
= 𝑝𝑝and
𝑎𝑎=
and 𝑐𝑐𝑐𝑐and
𝑐𝑐+
+= ((𝑐𝑐(𝑎𝑎+
𝑎𝑎𝑎𝑎+𝑁𝑁𝑁𝑁 ))represents
𝛾𝛾𝛾𝛾𝛾𝛾 )𝑎𝑎𝑎𝑎(𝑎𝑎represents
represents )−−−
represents𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑁𝑁𝑁𝑁
−𝑁𝑁𝑁𝑁………...Equation
𝑁𝑁𝑁𝑁 productivity
𝑎𝑎productivity
productivity
productivity growth
growth666growth 6 provides Price
Price Price
view
a basis
Indices
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the
for
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PPP
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𝛾𝛾 inflation differential
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view
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sector.sector. 𝛿𝛿𝛿𝛿 and 𝛿𝛿 and
and contribution
contribution
contribution to
to to inflation
inflation inflation outcomes.outcomes.
outcomes. SpecialSpecia
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sector. 𝑇𝑇𝑇𝑇δ𝑇𝑇 and 𝑁𝑁𝑁𝑁 γ represent the share of literature
equilibrium
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equilibrium equilibrium view
condition
Indices condition the
condition
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Where
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𝑎𝑎 𝑁𝑁𝑁𝑁
represents
represents represents productivity
productivity
productivity
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growth growth Price
Price
interest Indices
Price Indices
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whi
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𝛾𝛾
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labour 𝛾𝛾 represent
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share share of
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outcomes. Special
for forthe
sector thethetradeable
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respectively. tradeable and
2and andnon-tradeable
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and non-tradeable
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Combining sector.
sector.
sector. 𝛿𝛿𝛿𝛿𝛿𝛿and
sector.
equation and
and𝛿𝛿 and contribution
readily tested
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Specibet
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Bulletin Bulletin
tradeable Volume and
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tradable tradable sector
sector sectorrespectively. respectively. and
respectively. andand differentials
frameworks.differentials
differentials As observed
noted observed by
in
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Wang, in
thethe et
tradables
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tradables(2007),
and
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3,4,5 integration
frameworks.
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bystudying
Wang, As noted
etetdistinctly
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(2007), the
the
𝛾𝛾𝛾𝛾𝛾𝛾 represent
Combining 𝛾𝛾 and
represent
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equation
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share
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66in𝛿𝛿in
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(𝑦𝑦
trend
of
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o
relative
ativeResearch to
to those those
Combining
differential Combining ∆𝑝𝑝 − equation
∗model.
∆𝑝𝑝 equation
∗
= ∆𝑒𝑒 3,4,5 + 3,4,5
(1 and
− 𝛼𝛼 and
𝛿𝛿 ) [( 6yields
) ∆𝑎𝑎yields
𝑇𝑇
− the
∆𝑎𝑎 theet
𝑁𝑁𝑁𝑁
] − al. (2007),
long-run the
representation long-run for representation
Swaziland and South
Bulletin
tradeable
Volume
∆𝑝𝑝𝑡𝑡 − ∆𝑝𝑝and 2 𝑡𝑡 = ∆𝑒𝑒 𝑡𝑡 𝑡𝑡 + (1 − 𝛼𝛼𝑡𝑡 ) [( ) ∆𝑎𝑎𝛾𝛾𝑡𝑡 − ∆𝑎𝑎
tradable 𝑡𝑡
sector 𝑡𝑡 𝑇𝑇
respectively.
𝑁𝑁𝑁𝑁
𝑡𝑡 𝑡𝑡 ] − long-run
𝑡𝑡 long-run
and representation
representation
differentials for
observedfor Swaziland Swaziland in the and
and South
tradablesSouth and are
are
tradeable
tradeable tradeable and 𝑡𝑡and and tradable
tradable tradable sector
sector sector respectively.
respectively.
respectively. and
and
for inflation
Swazilanddifferentials
anddifferentials
differentials
and inSouth
differential observed
observed observed
arising in
Africa’s in the
the
in tradables
thetradables
prices tradables and
inBalassa and an
of from the Balassa-
𝛾𝛾
following
following following inflation inflation differentialdifferential model. model.𝑁𝑁𝑁𝑁 inflation
inflation differential
differential arising arising from from the the Balassa-
∗ inflation differential 𝛿𝛿 model.
ve to those 𝛿𝛿 ∗ − 𝛼𝛼 ) 𝑇𝑇 Africa’s
Africa’s Africa’s
prices
prices prices
inin the
the basis
basis the of of basis
aarelative
relative a relative
PPP PPP can
can PPP
bebe can be
∆𝑝𝑝 − ∆𝑝𝑝 = ∆𝑒𝑒 ∗+ (1 [( ) ∆𝑎𝑎 − ∆𝑎𝑎 ] − non-tradables so as to make inference for cases ofwhi
Combining
Combining
Combining 𝑡𝑡 Combining (1 𝑡𝑡 ∗−equation 𝛼𝛼 𝛿𝛿
equation∗𝑡𝑡 ) equation
equation [( )
𝑇𝑇∗ ∆𝑎𝑎3,4,5
3,4,5 𝑇𝑇∗
𝑡𝑡3,4,5 −
3,4,5
𝑁𝑁𝑁𝑁∗ and
∆𝑎𝑎
and
and
𝑁𝑁𝑁𝑁∗
𝑡𝑡 and 6
6 6 yields
yields
𝑡𝑡yields
6 yields the
].......................Equation
the
the the
the basis
non-tradables
7
non-tradables of
non-tradables a relative
so so as as
so to PPP
to
as make make
to can
makeinference
inferencebe shown
inference for
for by
cases
cases
for of
cases ofwh
(1 − 𝛼𝛼𝑡𝑡 ) [(𝛾𝛾𝑡𝑡 ∗) ∆𝑎𝑎 𝛾𝛾∗𝑡𝑡 − 𝑡𝑡∆𝑎𝑎𝑡𝑡
𝛾𝛾 ].......................Equation
𝑡𝑡 7 SamuelsonSamuelson
Samuelson
shown byeffect.
effect.
the effect.
following:
ddecomposing
by decomposing the
shown
shown following:
by
inflation bythe thefollowing:
following: arising from the Balassa-capt
differential cap
following
following
(1following 𝛼𝛼𝑡𝑡∗ ) [(inflation
−following
𝛿𝛿 ∗
inflation
inflation
) 𝑇𝑇∗ differential
inflation
∆𝑎𝑎 −differential
differential
∆𝑎𝑎 differential
𝑁𝑁𝑁𝑁∗ model.
model.
model. model.
].......................Equation 7 inflation
inflation
inflation differential
differential
differential arising arising arising from
from from the
thethe Balassa-
Balassa-Balass
𝛾𝛾∗ 𝑡𝑡 𝑡𝑡 𝑠𝑠𝑠𝑠 𝑠𝑠𝑠𝑠
traded 𝑠𝑠𝑠𝑠𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝛼𝛼 + 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 .............………………..Equation 8
ed and and
ecomposing non-non- FromFrom a B-Samodel B-S model as noted as noted by Mihaljek by Mihaljek (2002)the (2002)the 𝑠𝑠𝑠𝑠
Samuelson
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
Samuelson=
Samuelson=𝛼𝛼𝛼𝛼++𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
Samuelson effect.
effect.
effect.
𝑠𝑠𝑠𝑠
𝑠𝑠𝑠𝑠
.............………………..Equation
effect..............………………..Equation 88 con
con
mestic and abroad Central aaBank onBank ofof Swaziland
the ofbasis of© 2018
©equation 7, (2002)the
inflation differential 126
126 ||126 pric
cand
and non-
abroad From
From
Central Central
on B-S
B-S
Bank
the model
model
basis Swaziland asasnoted
Swaziland
of noted
equation ©by
by
2018 7,Mihaljek
Mihaljek
2018 inflation (2002)
differential Where 𝑠𝑠𝑠𝑠 𝑃𝑃 𝑠𝑠𝑠𝑠
represents consumer prices for
pri
|
PP aa gP
the g e a
e g
on basis e
the of basis of equation 7,differential
inflation Where
Where
Where 𝑃𝑃
𝑃𝑃 𝑠𝑠𝑠𝑠represents
represents
represents consumer consumer
consumer prices
prices prices
for
for
and abroad on between the between equation
domestic 7, country
inflation mul
mu
domestic country and and abroad abroad would wouldbe
for
beSwaziland and
Swaziland and 𝑠𝑠𝑠𝑠𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
𝑠𝑠𝑠𝑠
𝑠𝑠𝑠𝑠
represents
represents South
South Africa’s
differential
Central
Central
Central Central Bank
Bank Bank of
of
Bank between
of Swaziland
Swaziland
Swaziland
of Swaziland ©©domestic
© 2018
2018
2018
© 2018 country and Swaziland
Swaziland and
and 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 represents
represents South
South Africa’s
Africa’s 126
126
126 || |126 |
PPbetween
Paa aggexpressed
abroad ee ea gwould domestic country
expressed asbea as expressed
sum a sum of the
and abroad
ofnominal
theanominal
as sum
would exchange
of
exchange
be
the rate rateconsumer
Africa’s consumer prices. prices. This This paper
paper adopts
pric
the
pri
…… Equation
quation 3 3 gP e
consumer
consumer prices. prices. This This paper paper adopts adopts the the
ation 3
expressed
nominal depreciation as a sum of the
exchange rate
and nominal
the depreciation exchangeaverage
weighted rate
and adopts
of the the Generalized Error Correction coef coe
depreciation and the weighted average of the Generalized
Generalized Generalized Error
Error Error
Correction
Correction Correction Model
Model Model
(GECM)
(GECM) (GECM)
toto to
…… Equation the weightedandaverage of theaverage productivity Model (GECM) to estimate the long-run
quation 4 4 depreciation productivity the weighted
growth differentials of the
between theestimate the the long-run relationship,
ation 4 productivity
growth differentials between the tradeable
productivity growth differentials between the
growth differentials between relationship,
the
estimate
estimate the
the long-run long-run disequilibrium relationship,
relationship, and the the the
the 𝑘𝑘𝑘𝑘11=
and tradeable non-tradeabletradeable and and non-tradeable non-tradeable
goods sector goods goodsof
sector thesector
of the
short-run
of thedisequilibrium dynamics. and According the short-run to Banerjee dynamics.
traded
ed goods goods
and and disequilibrium
disequilibrium andand the the short-run short-run dynamics.
dynamics.
goods and tradeable and non-tradeable goods sector of the et al (1993) as quoted by De Boef (2000) a 10 10
domestic country 𝑇𝑇(∆𝑎𝑎𝑡𝑡𝑇𝑇 − 𝑁𝑁𝑁𝑁∆𝑎𝑎𝑡𝑡𝑁𝑁𝑁𝑁 ) and that of theAccording to Banerjee et al (1993) as quoted by
-traded
ded goods 𝛼𝛼 domestic
goods 𝛼𝛼 domesticcountry
domestic country (∆𝑎𝑎𝑡𝑡𝑇𝑇 − ∆𝑎𝑎
country (∆𝑎𝑎𝑡𝑡 𝑁𝑁𝑁𝑁 − ∆𝑎𝑎𝑡𝑡 ) and
𝑡𝑡 )𝑇𝑇∗and that
and that thatof the
of the According
AccordingtotoBanerjee
generalized one
Banerjee stepetet alal(1993)
error correction
(1993) asasquoted quoted model byby
d goods 𝛼𝛼 country abroad (∆𝑎𝑎 − ∆𝑎𝑎 𝑁𝑁𝑁𝑁∗
). The Balassa- 𝑘𝑘𝑘𝑘11is
goods of
in each the
country country abroad abroad 𝑇𝑇∗(∆𝑎𝑎𝑡𝑡 𝑁𝑁𝑁𝑁∗
𝑇𝑇∗
− 𝑡𝑡∆𝑎𝑎 𝑁𝑁𝑁𝑁∗ . The
).𝑡𝑡 Balassa-
The Balassa- is
De a
De Boef De
transformation
Boef (2000) Boef (2000)
(2000) aa generalized and a
generalized one generalized
re-parameterization one step one
step error error error
step
ods
s in eachin each country abroad (∆𝑎𝑎 − ∆𝑎𝑎 ). 𝑡𝑡The
Balassa-Samuelson Samuelson Effect
𝑡𝑡
Effect hashas
𝑡𝑡
been beenwidely widely
used of andan Autoregressive
correction model Distributed
is a transformation Lag (ARDL) and re- long
lon
is
ven given
by: by: Samuelson Samuelson Effect Effecthas has
been been
widely widely
used used
to try to trytoand
and
try
correction
correction model
model isis aa transformation
transformation and
and re-
re-
n by: used to try and explain inflation differentials model which allows the model to be used to Swa Sw
explain explain inflation inflation differentials differentials particularly
particularly in theparameterization
parameterization
estimate
parameterization relationships ofof among an of
an an
Autoregressive
stationary
Autoregressive Autoregressive
and
particularly
explain inflation in the differentials EU (see.particularly Milhaljek, the in the
in2002;
........Equation
Equation 5 5 5 unit root processes.
Distributed LagAccording(ARDL) model to Boef which (2000)allows
uation Coudert,
EU EU (see.(see. EU2004) Milhaljek,(see. Milhaljek,and Milhaljek,Miletic,
2002; 2002;Coudert,2002;
2012).
Coudert, Coudert,
2004) and2004)
2004) and and
Distributed
Distributed Lag
Lag(ARDL) (ARDL) model
modelwhich which allows
allows the the 3
the
ge rate expressed Miletic, 2012) model
modelto model
tobe beused to be
used totoused
estimate
estimate to estimate relationships
relationships relationships amongamong
among
eate expressed
expressed Miletic, Miletic, 2012) 2012)
erofunit
tnit of foreign
foreign
of foreign 3. 3. Empirical 3.
Empirical Empirical Strategy Strategy Strategy
stationary
stationary stationary
Centraland
and
Boef (2000)
unit
Bank unit and
Ofroot root unit
Swaziland processes. root
processes. processes.
© 2018 According
111
According According
toto to
The
Th
Boef
Boef (2000) (2000) under under
under thethe assumption the assumption
assumption ofof weakweak of weak
diffe
dif
C E N T R A L B A N K O F S WA Z I L A N D | RESEARCH BULLETIN VOLUME 2 Research Bul
differential
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to tradables Volum
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and by
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Thisproposed can be This done can by beadopting done by adopting African
the single equation GECM yields an𝑥𝑥equation unbiased, proposed done and non-tradables.
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proposed
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proposed proposed
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Rabanal
the 𝑇𝑇∗ PPP
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𝛼𝛼0 + 𝛾𝛾consistent (𝑦𝑦𝑡𝑡−1 − 𝑥𝑥𝑡𝑡−1 ) + 𝜏𝜏 1 ∆𝑥𝑥 𝑡𝑡
and efficient estimators which Rabanal
+ 𝜏𝜏 2 𝑡𝑡−1 an equation an
(2009): ∗ equation
proposed by proposed
Rabanal ∆𝑝𝑝
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Rabanal
𝑡𝑡 ∆𝑝𝑝 ∗
𝑡𝑡 =(2009):∆𝑝𝑝𝑡𝑡𝑇𝑇 − ∆𝑝𝑝 used
𝑡𝑡 + (f
an equation ∆𝑝𝑝𝑡𝑡 −proposed ∆𝑝𝑝𝑡𝑡 =𝑇𝑇∗∆𝑝𝑝 by𝑇𝑇Rabanal 𝑇𝑇∗(2009): (1 ∗ )(∆𝑝𝑝 𝑇𝑇∗ used for t
arch
earchBulletin
Bulletin Volume
Volume 22 𝑡𝑡 − ∆𝑝𝑝 ∆𝑝𝑝 𝑡𝑡 ∆𝑝𝑝 − +𝑡𝑡∆𝑝𝑝 −
monthly
𝑁𝑁∗
−=𝛾𝛾∗∆𝑝𝑝
∗∆𝑝𝑝 =𝑡𝑡𝑇𝑇∆𝑝𝑝 from 𝑡𝑡𝑡𝑡𝑇𝑇∆𝑝𝑝
−𝛾𝛾)(∆𝑝𝑝 −−𝑡𝑡𝑇𝑇∗
∆𝑝𝑝𝑇𝑇+𝑡𝑡𝑇𝑇∗
1993 (1+ –−(1 𝑁𝑁2𝛾𝛾
makes it to be
…..................................................…………..Equationboth ‘theoretically ∆𝑝𝑝 𝑡𝑡 − appealing
∆𝑝𝑝 ∗
𝑡𝑡 = ∆𝑝𝑝 𝑇𝑇
𝑡𝑡 − ∆𝑝𝑝 𝑇𝑇∗
𝑡𝑡 + (1 − 𝛾𝛾 ∗ )(∆𝑝𝑝 𝑡𝑡∗ − 𝑇𝑇
𝑡𝑡 ∆𝑝𝑝
𝑇𝑇∗ 𝑡𝑡 𝑡𝑡 ) − 𝑡𝑡 (1 ∗ − 𝑇𝑇∗ 𝑡𝑡 −
monthl∆𝑝𝑝 𝑡𝑡fr)
∆𝑝𝑝∆𝑝𝑝 − ∆𝑝𝑝 𝑡𝑡 = 𝑇𝑇∗ ∆𝑝𝑝 − (1 )(∆𝑝𝑝 monthly
−−∆𝑝𝑝 + 𝑇𝑇∗ − 𝛾𝛾 − 𝑁𝑁 𝑁𝑁
∗ ∗ 𝑁𝑁∗ 𝑇𝑇 𝑇𝑇∗ ∗ 𝑇𝑇∗
and ∆𝑝𝑝∆𝑝𝑝 𝑡𝑡 − ∆𝑝𝑝∆𝑝𝑝
𝑡𝑡 −𝑁𝑁∆𝑝𝑝 𝑡𝑡 𝑡𝑡=𝑡𝑡= )∆𝑝𝑝 𝑡𝑡 − 𝑇𝑇 −
− ∆𝑝𝑝
𝑡𝑡𝑡𝑡 (1 −
∆𝑝𝑝 𝛾𝛾)(∆𝑝𝑝
𝑡𝑡𝑡𝑡 + (1
+ 𝑡𝑡(1 𝑇𝑇
∆𝑝𝑝
𝛾𝛾𝑁𝑁∗ 𝑡𝑡 )(∆𝑝𝑝
𝛾𝛾∗ )(∆𝑝𝑝
𝑁𝑁 −for
).........…….Equation
𝑡𝑡−(1 𝑇𝑇 𝑡𝑡 𝑇𝑇 −11
∆𝑦𝑦𝑡𝑡 𝑡𝑡=also
∆𝑦𝑦 +statistically
=𝛼𝛼𝛼𝛼0Research
0 + 𝛾𝛾(𝑦𝑦
𝛾𝛾(𝑦𝑦𝑡𝑡−1 −−𝑥𝑥𝑥𝑥𝑡𝑡−1superior ))++𝜏𝜏𝜏𝜏1 ∆𝑥𝑥
21 ∆𝑥𝑥
to
𝑡𝑡 𝑡𝑡+
∆𝑝𝑝 +𝜏𝜏)𝜏𝜏2the
𝑁𝑁∗ 𝑥𝑥𝑥𝑥𝑡𝑡−1 Engle
− (1 − 𝛾𝛾)(∆𝑝𝑝 𝑇𝑇
− ∆𝑝𝑝 ).........…….Equation 11
𝑡𝑡∆𝑝𝑝
𝑡𝑡 ∆𝑝𝑝 ) 𝑡𝑡𝑡𝑡𝑁𝑁∗
− )(1
series 𝑡𝑡 − − 𝛾𝛾)(∆𝑝𝑝 − 𝛾𝛾)(∆𝑝𝑝 subcomponents
𝑡𝑡 −𝑡𝑡∆𝑝𝑝 𝑡𝑡 ∆𝑝𝑝 𝑡𝑡 )..
).........…
and Granger
𝑡𝑡−1
Bulletin 𝑡𝑡−1
two-step Volume
method’ (pg. 83). The ∆𝑝𝑝∆𝑝𝑝𝑡𝑡 2 𝑡𝑡−1 𝑡𝑡 𝑡𝑡 𝑁𝑁∗ 𝑇𝑇 𝑁𝑁 series series for
−−(1(1∆𝑝𝑝 ) − 𝑡𝑡𝑡𝑡(1− −−∆𝑝𝑝 𝛾𝛾)(∆𝑝𝑝 𝑡𝑡 −Where ∆ is11the
∆𝑝𝑝𝑡𝑡 ).........…….Equation 11 year-on-year 11
𝑁𝑁∗ 𝑇𝑇 𝑁𝑁
𝑡𝑡 𝑡𝑡) )
𝑁𝑁∗ 𝑇𝑇 𝑁𝑁
……………..................................................…………..Equation −−𝛾𝛾)(∆𝑝𝑝
𝑡𝑡𝛾𝛾)(∆𝑝𝑝 ∆𝑝𝑝 ).........…….Equation
𝑡𝑡𝑡𝑡 ).........…….Equation anddifference analysis thus vary
esearch
rch Bulletin ……………..................................................…………..Equation
Bulletin
GECM Volume Volume
model2 2
estimated is given by: Where ∆ is the year-on-year operator;
r the Purchasing
earch Bulletin Volume 2 ∆𝑦𝑦𝑡𝑡 = 𝛼𝛼0 + 𝛾𝛾(𝑦𝑦𝑡𝑡−1 − 𝑥𝑥𝑡𝑡−1 ) + 𝜏𝜏1 ∆𝑥𝑥𝑡𝑡 + 𝜏𝜏2 𝑥𝑥𝑡𝑡−1 Where Where𝑝𝑝𝑡𝑡 ,∆𝑝𝑝𝑡𝑡𝑇𝑇is the ∆ is the
andyear-on-year year-on-year
𝑝𝑝𝑡𝑡𝑁𝑁 are and and analys
natura diffe a
n hasing
2 99
∆𝑦𝑦 = 𝛼𝛼 ∆𝑦𝑦 + = 𝛼𝛼0 +−𝛾𝛾(𝑦𝑦
𝑡𝑡𝛾𝛾(𝑦𝑦 𝑥𝑥 𝑡𝑡−1) +− 𝜏𝜏𝑥𝑥Where
𝑡𝑡−1
∆𝑥𝑥
) + 𝜏𝜏∆1 ∆𝑥𝑥
+ 𝜏𝜏 𝑥𝑥
is the
𝑡𝑡 + 𝜏𝜏2year-on-year
𝑥𝑥𝑡𝑡−1Where
WhereWhere ∆ ∆
difference
is
is isWhere
thethe
𝑇𝑇 the ∆
year-on-year
operator;
is
year-on-year the
year-on-year
𝑁𝑁 year-on-year
difference
difference availability
difference difference
operator;
operator; of a given
operator; chose
on 2 ∆𝑦𝑦∆𝑦𝑦 𝑡𝑡 = = 𝑡𝑡𝛼𝛼0𝛼𝛼+ + 0𝛾𝛾(𝑦𝑦 )𝑡𝑡−1
+ 𝜏𝜏1𝜏𝜏∆𝑥𝑥∆𝑥𝑥
− 𝑥𝑥……………..................................................…………..Equation
1𝑡𝑡 + + 𝑡𝑡𝜏𝜏2𝜏𝜏𝑥𝑥𝑡𝑡−1 𝑝𝑝𝑡𝑡 , 𝑝𝑝𝑡𝑡 and 𝑝𝑝𝑡𝑡 are𝑝𝑝 natural 𝑇𝑇 logarithms 𝑁𝑁 of the log
availability
𝑦𝑦𝑡𝑡 represents 𝑡𝑡−1 𝑡𝑡−1
𝛾𝛾(𝑦𝑦
the 𝑡𝑡−1 − 𝑥𝑥𝑡𝑡−1
𝑡𝑡−1
Swaziland )+ 1 𝑝𝑝 𝑡𝑡, consumer
2 𝑡𝑡−1
𝑇𝑇 2 𝑥𝑥𝑡𝑡−1 𝑁𝑁 , 𝑝𝑝and
, 𝑝𝑝𝑝𝑝𝑡𝑡𝑇𝑇𝑡𝑡consumer 𝑡𝑡 and 𝑝𝑝𝑡𝑡𝑁𝑁 𝑝𝑝price 𝑡𝑡 are
are natural
index, natural
availab its
𝑡𝑡 𝑝𝑝𝑡𝑡 and 𝑝𝑝𝑡𝑡 are 𝑝𝑝 natural logarithms of𝑁𝑁 the𝑡𝑡logarithms
𝑡𝑡 0
……………..................................................…………..Equation , 𝑝𝑝 𝑇𝑇
and
𝑡𝑡𝑝𝑝 𝑡𝑡 and 𝑝𝑝𝑡𝑡𝑝𝑝, 𝑝𝑝
𝑇𝑇 𝑝𝑝 𝑁𝑁
𝑁𝑁𝑇𝑇
are
and natural𝑝𝑝𝑡𝑡 index, are natural of the
logarithms of the
.As Where ……………..................................................…………..Equation
As ……………..................................................…………..Equation
𝑦𝑦 represents 9 the Swaziland consumer operator;
𝑝𝑝 𝑡𝑡 , 𝑡𝑡 consumer 𝑡𝑡
𝑡𝑡 𝑡𝑡 are
price natural , and
logarithms its
consumer 4.are tradablenatural
Empirical of
price the
component Results
index, its t
s shown ……………..................................................…………..Equation
Where
in equation 𝑦𝑦𝑡𝑡 𝑡𝑡 represents
9 2
the Swaziland consumer consumer price index, its tradable component consumer and price
non-tradable index, 4. its
4. trada
Empiric
compon Em
ogged
ure
inture equation
9 and
prices 9 2 𝑥𝑥 𝑡𝑡
logged
represents
and 𝑥𝑥 represents
the logged
the logged
South South
logarithms
consumer
consumer and price
of the
price
consumer index,
index,
non-tradable
consumer
price its tradable
its index,
tradable
component
price component
its index, component
tradable
component for Swaziland
ion
22 2 9
prices loggedAsand 𝑥𝑥𝑡𝑡 𝑡𝑡 represents the logged South its tradable component and andand ∗ non-tradable
non-tradable component compone
on equilibrating model. Where 𝑦𝑦𝑡𝑡 represents and non-tradable the Swaziland component
and consumer non-tradable for Swaziland component 𝑝𝑝non-tradable
for𝑡𝑡This 𝑡𝑡 section
𝑇𝑇∗
, 𝑝𝑝Swaziland and 𝑝𝑝𝑡𝑡𝑁𝑁∗covers are This thethe
section
samem
run
ing
-run
el. model.
consumer
As African As prices.
consumer Where 𝛾𝛾 measures
prices.
𝑦𝑦 𝛾𝛾
represents measures the the speed
the speed
Swaziland at at and
consumer non-tradable
𝑝𝑝 ∗
, and
𝑝𝑝 𝑇𝑇∗
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, 𝑝𝑝estimated and 𝑝𝑝are ∗are the same
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. (2004)
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𝑦𝑦 𝑡𝑡 represents
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)). The correction (i.e.
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𝑡𝑡 andwould then 𝑡𝑡 further 𝑡𝑡 𝑇𝑇∗ 𝑁𝑁∗
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from the long-run boundary (of about -1.1 and 1.1
between Swaziland and South Africa. Towards the Source: Author’s calculations using data from CSO and STATSSA
end of 2009 the differential fell below the lower 4.2. Analysis of CPI Sub-components trends
bound mainly due to a collapse in commodity This sub section presents graphical analysis of the
prices which was mainly influenced by the second CPI components. Special focus goes into
roundThe effects of theresults
estimated global can
financial
also becrisis. 4.2. Analysis
shown computation of of CPI Sub-components
inflation differential between
graphically
Throughout the yearas shown in figuredifferential
2012 inflation 1. As noted trends
tradables and non-tradables. Due to data
in figure 1, inflation differential does tend This sub section presents graphical analysis
was elevated
to deviate abovefrom3 percentage
the long-run points largely (of limitations,
boundary of the CPI this analysis is only
components. done for
Special the goes
focus year
due toabout
domestic-1.1taxandreforms
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per had
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estimation in 2014 into –computation of inflation
2016 focusing on recent inflation differential
Specification 1). For example, a17common Research Bulletin Volume 2 tradables and non-tradables. Due
between
pressures on Swaziland’s consumer prices . This differential and this using
is sufficient
shock Swaziland
between of a rise and in international
South Africa. Towards prices
the to data
Source: limitations,
Author’s calculations this CSOfor
analysis
data from and this
is study
only
STATSSA done as
studyparticularly
takes more interestoil andonfood the sources
prices for of thesome the forfocus
the year 2014 – 2016
is mainly on the focusing
recentoninflation
recent
end of 2009 the differential fell below the lower 4.2. Analysis of CPI Sub-components trends
recentselected
inflation months in 2007
differential andin2008
observed 2016.resulted
The inflation differential and this is sufficient
in higher
bound mainly inflation differential
due to a collapse between differential
in commodity for this
This sub
observed
study
section
as in 2016.
the
presents
focus Theis CPI
graphical
mainlyfor goods
analysis
is
onof the
the
unpacking of theand
Swaziland sources
SouthisAfrica.
done inTowards
detail inthe theend recent inflation differential observed in
prices which was mainly influenced by the second used CPI
to proxy
components.
tradables while the CPI
Special focus
for services
goes into
of 2009
subsequent the differential fell below the lower 2016. The CPI for goods is used to proxy
section.
round
boundeffects
mainlyofduethe to aglobal
collapsefinancial crisis. iscomputation
in commodity
used to proxy non-tradables. As noted in
tradables while the CPI for
of inflation servicesbetween
differential is used
Figureprices which
1: Swaziland
Throughout was2012
and
the year mainly
South Africa influenced
inflation equation
differentialby tradables
Inflation 11, the interest is to study
to proxy non-tradables. As noted in equation the sources of
and non-tradables. Due to data
the second
Differential Dynamics round effects of the global 11, thedifferential interest iswhether to study theythe sources of
was elevated above 3 percentage points largely inflation limitations, this analysis is only done
emanate
for the
from
year
financial crisis. Throughout the year 2012 inflation differential whether they emanate
5.0
due to domestic
inflation tax reforms
differential wasthat
elevated above 3 the
had inflationary from
2014
tradable
the
– 2016
differential
tradable between
differential
focusing on recent betweenthe two the
inflation
Inflation differential (percentage points)
percentage
4.0 points largely due to domestic
pressures on Swaziland’s consumer prices . This countries
17 two countries
or fromthis or from
respective respective internal
internal differential
tax reforms that had inflationary pressures differential differentialand between is sufficient for this study as
the tradable and non-
study
3.0 takes more interest on the sources the between thesector.
tradable andon non-tradable
the recentsector.
on Swaziland’s consumer prices17. Thisofstudy tradable
the focus is mainly inflation
takes
recent more interest
2.0 inflation differentialonobserved
the sources
in 2016. ofThe
the differential observed in 2016. The CPI for goods is
Figure 2: Sources of Inflation Differential
recent inflation differential Figure 2: Sources of Inflation Differential
unpacking
1.0 of the sources is done in observed
detail in thein between
used Swaziland
to proxy tradables andwhile
Souththe Africa
CPI for services
2016. The unpacking of the sources is done between Swaziland and South Africa
subsequent
in0.0detail insection.
the subsequent section. is used 8.00 to proxy non-tradables. As noted in
inflation differential (percentage
6.00
Jan-07
Jan-09
Jan-11
May-12
Jan-13
Jan-15
May-08
May-10
May-14
May-16
Sep-07
Sep-09
Sep-11
Sep-13
Sep-15
Figure equation4.00
11, the interest is to study the sources of
Figure1:1:
Swaziland and South Africa Inflation
-1.0
Swaziland and South Africa Inflation
Differential Dynamics inflation2.00
differential whether they emanate from
Differential
-2.0 Dynamics
5.0 0.00
the tradable differential between the two
points)
Jan-14
Jan-15
Oct-15
Jan-16
Oct-14
Oct-16
Apr-14
Apr-15
Apr-16
Jul-14
Jul-15
Jul-16
-3.0 -2.00
Inflation differential (percentage points)
4.0 countries or from respective internal differential

-4.00
CPI_diff Upper bound lower bound
3.0 between the tradable and inflation
Overall non-tradable
diff sector.
2.0 Goods inflation diff
Figure 2: Sources of Inflation Differential
Goods-Service diff_SA
1.0 between Swaziland and South Africa
Goods-Services diff_SW
0.0 8.00
Source: Author’s calculations using data from CSO and
inflation differential (percentage
Author’s6.00
Jan-07
Jan-09
Jan-11
May-12
Jan-13
Jan-15
May-08
May-10
May-14
May-16
Sep-07
Sep-09
Sep-11
Sep-13
Sep-15
Source:
STATSSA calculations using data from CSO and STATSSA
-1.0 4.00
According 2.00 to figure 2 the main drivers of the
-2.0 According 0.00
to figure 2 the main drivers of
observed
the observedinflation differential
inflation between Swaziland
differential between
points)
Jan-14
Jan-15
Oct-15
Jan-16
Oct-14
Oct-16
Apr-14
Apr-15
Apr-16
Jul-14
Jul-15
Jul-16
-3.0 -2.00
17 Swaziland
and South -4.00 andinSouth
Africa 2016 was Africa in 2016
largely due towas (i)
The tax reformsCPI_diff
included an Amendment
Upper boundof the Sales Taxbound
lower in
December 2011 and the introduction of VAT in April 2012. largely due to (i) the differential between
Source: Author’s calculations using data from CSO and the differential
tradables forbetween
the twotradables
Overall inflation diff for the two
countries and (ii)
EffectsSTATSSA
of VAT on Swaziland’s prices are well documented by
Goods inflation diff
Nxumalo and Mabuza (2013) the internal differential between the
Goods-Service diff_SA
Central Bank of Swaziland © 2018 tradable and non-tradables in Swaziland.
130 |
Page Goods-Services diff_SW
The tax reforms included an Amendment of the
17 The differential between tradables of the
Sales Tax in December 2011 and the introduction of two countries reflects a violation of the
Source: Author’s calculations using data from CSO and STATSSA
VAT in April 2012. Effects of VAT on Swaziland’s prices ‘Law of One Price’ (LOP) and this paper
are well documented by Nxumalo and Mabuza (2013) would explore
According to figure some 2 theof mainthe drivers
factorsofthatthe
observed inflation differential between Swaziland
17 Centralan
The tax reforms included Bank
114
Of Swaziland
Amendment © 2018
of the Sales Tax in
December 2011 and the introduction of VAT in April 2012.
and South Africa in 2016 was largely due to (i)
the differential between tradables for the two
Effects of VAT on Swaziland’s prices are well documented by
might have led to this in 2016. The second Notes: SA_inflation_Weight_adj series represents the
aspect of the differential between the local SA inflation calculated using Swaziland’s CPI weights.
The difference between the bars and SA inflation
tradables and non-tradables can be inferred represent the portion of inflation differential that
to provide some information on what can be is explained by weights-differential (40 %)and the
termed the internal version of the Balassa- difference between the bars and Swaziland inflation
Samuelson effect which according to Dedu represent the portion of inflation differential
and Dumitrescu (2010) can be interpreted arising from other factors other than the weights-
differential.
as the Baumol-Bowen effect. To unpack this
effect further information on productivity
4.2.2. Supply Side Inflation Pressures
in the tradable and non-tradable sectors is
The next step is to investigate some of the
required. However, Swaziland does not have
reasons apart from weights-differential that
good productivity data to support further
explains the 60 per cent differential observed
analysis for this.
from figure 3. The first stop is looking at the
important sub-component which is “Food
4.2.1. The Role of CPI Weights
and non-Alcoholic Beverages” (FNAB). This
The different composition of Consumer Price
component accounts for 29.22 per cent in
Indices (CPI) weighting structure across
the consumption basket. Food prices are
countries is one of the often cited reasons
highly linked to food productions and shocks
why inflation differential may persist
thereof and thus represent a good proxy to
across countries. To test this in the case of
understanding supply side factors in the CPI.
Swaziland the paper uses a crude method of
recalculating South Africa’s inflation using
Figure 4: Food Inflation Trends
Swaziland’s CPI weights composition and then
compares the CPI-weight adjusted series to
the Actual for Swaziland. The results of these
calculations are shown in figure 3. As noted
from figure 3, the CPI weight differential does
explain some of the differential observed in
2016. The weights only explain an average
Research Bulletinof
Volume
about2 0.6 percentage points of the total
erential
1.5 percentage points observed. That is; the
differential partially explains 40 per cent of the
weights differential partially explains 40 per
bles in observed
cent of differential
the observedin 2016.
differential in 2016.
Source: CSO and STATSSA
ables of
Figure
Figure3:3:
Inflation
InflationDifferential
Differentialdue
duetoto
he ‘Law Differences in CPI Weights
Differences in CPI Weights
explore 9.0%
CPI year-on-year % growth
7.0%
o this in
5.0%
erential 3.0%
Jan-14
Jan-15
Jan-16
Apr-14
Oct-14
Apr-15
Oct-15
Jul-14
Apr-16
Oct-16
Jul-15
Jul-16
adables
ation on
SA_inflation_Weight adj
n of the SA_inflation_Actual
ding to SW_inflation
rpreted Source: Author’s calculations using data from CSO and

Source:
STATSSAAuthor’s calculations using data from CSO and STATSSA.
is effect
Notes: SA_inflation_Weight_adj series represents the SA
in the
inflation calculated using Swaziland’s CPI weights. The
equired. difference between the bars and SA inflation represent the Central Bank Of Swaziland © 2018
115
e good portion of inflation differential that is explained by weights-
Box 1: Food Inflation Components Comparison; South Africa versus Swaziland

Box 1: Food Inflation Components Comparison; South Africa versus Swaziland
Bread and Cereals Price Index Sugar and Sugar Products Price Index
30 35
25 30
25
y-o-y % growth
y-o-y % growth
20
20
15
15
10
10
5 5
0 0
Jul-15
Jul-16
Jul-15
Jul-16
Nov-16
Jan-15
May-15
Nov-15
Jan-16
May-16
Nov-16
Jan-17
Jan-15
May-15
Nov-15
Jan-16
May-16
Jan-17
Mar-15
Sep-15
Mar-16
Sep-16
Mar-15
Sep-15
Mar-16
Sep-16
SA_Bread n Cereal SW_bread n cereals SA_sugar prod SW_sugar prod
Meat Price Index Eggs and Dairy Products Price Index

10 14
9 12
8
7 10
y-o-y % growth
y-o-y % growth
6 8
5
4 6
3 4
2
2
1
0 0
Jul-15
Jul-16
Jul-15
Jul-16
May-15
Nov-15
May-16
Sep-16
Nov-16
May-15
Nov-15
May-16
Nov-16
Jan-15
Mar-15
Sep-15
Jan-16
Mar-16
Jan-17
Jan-15
Mar-15
Sep-15
Jan-16
Mar-16
Sep-16
Jan-17
SA_meat SW_meat SA_eggs n dairy SW_eggs n dairy
Vegetables Price Index Oils and Fats Price Index

40.00 25
35.00 20
30.00
25.00 15
y-o-y % growth
y-o-y % growth
20.00 10
15.00
5
10.00
5.00 0
Jul-15
Jul-16
Jan-15
May-15
Nov-15
Jan-16
May-16
Nov-16
Jan-17
Mar-15
Sep-15
Mar-16
Sep-16
-
-5
Jul-15
Jul-16
May-15
Mar-16
May-16
Jan-15
Mar-15
Jan-17
Sep-15
Nov-15
Jan-16
Sep-16
Nov-16
(5.00)
-10
SA_vegetables SW_vegetables SA_oils n fats SW_oils n fats
Source: Bank
Central CSO and
ofStatsSA
Swaziland © 2018 133 |
Page

As shown in figure 4 Swaziland and South The other notable differential is on ‘sugar
Africa’s food inflation tends to track and sugar related’ products. Like prices of
each other though there were significant ‘bread and cereals’ the trend is similar but
differentials in 2007-2008; 2012 and 2016. growth rates for Swaziland are significantly
The differential observed in 2007-2008 higher than those of South Africa. This is
and 2016 were driven by common shocks. surprising from two grounds: first Swaziland
In 2007-08 there was a significant surge in is a net exporter of sugar; secondly sugar
international oil and food prices but the price setting is harmonized between
observed food inflation was notably higher Swaziland and South Africa amid on a one-
in Swaziland than in South Africa. A similar month lag basis. In 2016, sugar prices rose
story was observed in 2016, a common shock twice; by 12.5 per cent in February and 15
from an El’nino induced drought resulted per cent in August. However, in the second
in asymmetric results in the food inflation half of the year after the second sugar price
outcomes for the two countries while the increase (in both countries) Swaziland sugar
2012 differentials were mainly informed prices are 10 percentage points higher than
by domestic factors that were unique to those of South Africa. This reflect that the
Swaziland at that time. cumulative 27.5 per cent increase went
through smoothly whilst for South Africa it
To analyse the asymmetric results in food might have not been fully implementable
inflation especially the most recent ones arguably because of an increased influx of
arising from the negative effects of the sugar imports (to the SA market) that might
drought, food inflation can be unpacked have put pressure on prices not to increase by
further to its sub-components. Box 1 shows the full 15 per cent in August 2016. This also
the comparison of major sub-components reflects differences in demand elasticities
within food inflation. It can be observed for sugar prices in the two countries.
that significant asymmetric trends or levels
of price changes come from the price indices Another worrying divergence within the food
for ‘bread and cereals’, ‘sugar and sugar components is that of prices of vegetables.
products’ and ‘vegetables’. For further Between November 2015 and March 2016
analysis, it is important to investigate the there was a significant acceleration in prices
sources of differences in the growth rates for vegetables in both Swaziland and South
of these price indices. As expected the Africa. However, for most part of the second
impact of drought on maize weighed heavily half of 2016 South Africa’s vegetable’s prices
on cereals in what could be termed the have been on a downward trend closing the
first round effects of the drought. Prices of year 2016 at below 5 percent. An opposite
‘bread and cereals’ products particularly trend was observed in the case of Swaziland
mealie meal accelerated significantly early with vegetable prices reaching 35 per cent
in the year reflecting food supply shortages year-on-year increase in the last two months
in both Swaziland and South Africa. of 2016.
However, the increase was too pronounced Additional pressures on the supply side can
in Swaziland cereal prices with a differential also be studied from administered prices.
of about 10 percentage points. One of the Administered prices broadly relates to the
developments that might have contributed prices that are regulated by some governing
to this differential is the bottlenecks in body. While administered prices vary from
supply mainly the ban on the importation of country to country in terms of coverage, the
mealie meal implemented through National common ones for both Swaziland and South
Agricultural Marketing Board (NAMBOARD). Africa are electricity, water, fuel and public

117
transport. Figure 5 shows the trends for the for these components tend to be higher
two countries in administered prices. with an average of 1.7 percentage points
reflecting mark-up in prices that incorporate
Though there is no clear relationship transportation and other retailing costs. The
Research Bulletin Vo
between the administered prices for these inflation differential for these components Research Bulletin V
two countries (as this reflect domestic pressures in the in
rose significantly economy particularly
the second in the
half of 2016 upwa
policies on regulated pricing), it can be pressures in the
signalling that economy
there particularly
were demand in the
pressures upw
second half of the year. mean
observed from figure 5 that administered in the economy particularly in the second
second half of the year. mea
prices in Swaziland were relatively higher half of 6:
the year. and footwear and 15 pe
Figure Clothing
throughout the year 2016. Administered furnishing and household equipment 15 p
Figure 6: Clothing and footwear and put
price increases included among others; a 25 Figure 6: Clothing and footwear and
furnishing and household equipment put
per cent increase in public transport fares furnishing and household
Clothing equipment
and Footwear index empl
and an 11.7 per cent increase in electricity. Clothing and Footwear index emp
evide
rch Bulletin Volume 2 12
evid
and
% GROWTH
Figure 5: Administered Prices 10
12
od 14 % GROWTH 8
10 and
incre
es. 12 68
10 46
incr
2016
Y-ON-Y
re 8 24 201
y-on-y % change
Y-ON-Y
or 6 02 4
4
May-16
Jan-13
May-13
Jan-14
May-14
Jan-15
May-15
Jan-16
Sep-13
Sep-14
Sep-15
Sep-16
a. 0 4
2 As h
May-16
Jan-13
May-13
Jan-14
May-14
Jan-15
May-15
Jan-16
Sep-13
Sep-14
Sep-15
Sep-16
16 0
As h
stron
Jan-14
Jan-15
Jan-16
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Jul-14
Jul-15
Jul-16
-2
a -4 Clothing and Footwear SA
instro
a
5 -6 Clothing
Clothingand
andFootwear
FootwearSW
SA
in a
holds
he Administered_SA Administered_SW
Clothing and Footwear SW
hold
provi
ng Source:
Source: CSO CSO
Furnishing and Household
wo In South Africa administered price movements prov
differ
Equipment
Furnishing index
and Household
In South Africa administered price movements
were merely a reflection of petrol price diffe
mean
were merely a reflection of petrol price Equipment index
10
movements
movementsin in lineline
withwith
international oil prices
international oil mea
viabi
Y-ON-Y-%GROWTH
so 8
prices and exchange rate developments. 10
and exchange rate developments. On the 6
viab
CMA)
Y-ON-Y-%GROWTH
es. On the contrary, there was hardly a change 48

contrary, there was hardly a change in fuel prices 26
es in fuel prices in Swaziland. The higher CMA
some
in Swaziland. Theprices
higherinadministered 04
administered Swaziland prices in
do also 2
le som
nomi
Jan-13Jan-13
May-13
Jan-14Jan-14
May-14
Jan-15Jan-15
May-15
Jan-16Jan-16
May-16
Sep-14
Sep-13
Sep-15
Sep-16
feed intodo
Swaziland inflation differential
also feed in Swaziland.
into inflation differential 0
ry nom
May-13
May-14
May-15
May-16
Sep-14
Sep-13
Sep-15
Sep-16
in Swaziland. As sh
th 4.2.3. Demand Side Inflation Pressures FURNISHING, HOUSEHOLD EQUIPMENT SA
To study
4.2.3. the demand
Demand side, Pressures
Side Inflation the paper differ
As s
er, FURNISHING,and
HOUSEHOLD EQUIPMENT SA
studies inflation differential for selected FURNISHING HOUSEHOLD EQUIPMENT
SW track
diffe
he components
To that covers
study the demand side, semi-durable
the paper studiesand
FURNISHING and HOUSEHOLD EQUIPMENT
ed durable products. These are ‘clothing and Source:
Source:CSO andand
STATSSA wher
trac
inflation differential for selected components that CSO SW STATSSA
footwear’ and ‘furnishing and household Swaz
covers semi-durable and 6durable products. These The demand
Source: pressures
CSO and STATSSA mainly came from the whe
equipment’. Figure depicts the growth The demand pressures mainly came from
rates
are for the
‘clothing price
and indices
footwear’ for‘furnishing
and ‘clothing and
and fiscal
The side. According
the demand
fiscal side. to the
According
pressures medium
to the
mainly term
camemediumbudget
from the Africa
Swa
he
footwear’ and ‘furnishing and household term budget
review reviewdelivered
for According
2016/17 for 2016/17
by thedelivered
minister of 50 ba
as household equipment’. Figure 6 depicts the fiscal side. to the medium term budget Afric
equipment’ indices. Swaziland’s prices by the minister of Finance, Government
ed growth rates for the price indices for ‘clothing Finance,forGovernment
review implemented
2016/17 delivered a salaryof
by the minister arbitr
50 b
and footwear’ and ‘furnishing and household
118
at review forGovernment
Finance, the civil service in July 2016.
implemented This
a salary arbi
Figur
equipment’ indices. Swaziland’s prices for these resultedforin the
a civil
26 percent and S
ly review service inincrease in This
July 2016. the
Figu
components tend to be higher with an average of
implemented a salary review for the civil Figure 7: Nominal Convergence – Swaziland
Research Bulletin V
service in July 2016. This resulted in a 26 and South Africa Nominal Policy Rates
percent increase in the government wage- 14.00 6.
bill for 2016/17 financial year and stretched 12.00 4.
the fiscal deficit for the year revised upwards 2.
10.00
from 13.7 per cent to 16.1 per cent. This 0.
meant that public sector wages rose by 8.00
-2.
more than 15 per cent in real terms. Such 6.00 -4.
adjustments also put pressure on private
4.00 -6.
sector wages as employees demanded similar
adjustments. This evidently put pressure on 2.00
prices of semi-durable and durable products 0.00 Sou
and hence the observed increases in these STAT
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
May-16
May-08
May-10
May-12
May-14
Sep-07
Sep-09
Sep-11
Sep-13
Sep-15
-2.00
prices in the second half of 2016. A c
-4.00
Sou
4.3. Monetary Policy Considerations infl_diff SW_nom_int SA_nom_int
As highlighted earlier inflation differential thr
Source:
Source: Authors
Authors calculations
calculations using
using data from data from
the SARB, theCSO
CBS, SARB,
and
has strong implications for monetary policy STATSSA. mo
CBS, CSO and STATSSA.
especially in a currency union. The fact that Of important note though; is the implied policy out
relative PPP holds between South Africa and
Of important
Swaziland provides relief that even though movements in note though;
real terms is the
which implied
takes into ran
policy movements in real
inflation differentials emerge from time to account inflation movements. This gives a better terms which takes
pol
time, they are mean reverting thereby they into account inflation movements. This gives
view of whether monetary policy is expansionary
do not threaten the viability and relevancy a better view of whether monetary policy is
rela
of the currency union (i.e. CMA). However, or expansionary
contractionary. or contractionary.
Policy rates in real Policy
termsrates
are per
in real
the inflation differentials impose some shown in figure 8. terms are shown in figure 8.
the
complications in terms of trade-off between
nominal convergence and real convergence. As As itit can
canbebeseenseeninin figure
figure 8; 8; whenever
whenever there there
are per
are significant inflation differentials
As shown in figure 7; regardless of the significant inflation differentials pursuing similar pursuing
On
inflation differential nominal policy rates in similar nominal rates to those of South Africa
Swaziland track closely those of South Africa widens the differential in real policy rates
nominal rates to those of South Africa widens the Cen
and translates
and in cases where there is a differential differential in realtopolicy
different
rates monetary
and translates policy
to pol
stances.
in policy rates, Swaziland policy rates fall different monetary policy stances. con
below those of South Africa amid at narrow
Figure 8: Real Convergence – Swaziland and the
margins of not more than 50 basis Research
points.Bulletin Volume 2
South Africa Policy Rates in Real Terms
This is expected given the capital arbitrage
14.00 6.00 Con
that comes with the CMA membership.
12.00 4.00
The
2.00
10.00
0.00 imp
8.00
Jul-08
Jul-14
Oct-07
Apr-09
Jul-11
Oct-10
Apr-12
Jan-13
Oct-13
Apr-15
Oct-16
Jan-07
Jan-10
Jan-16
-2.00 cur
6.00 -4.00
mo
4.00
Figure
-6.00
8: Real Convergence – Swaziland and
South Africa Policy Rates in Real Terms the
2.00 inf_diff SW_real_int SA_real_int
diff
0.00 Source: Authors
Source: Authors calculations
calculations using datausing data
from the from
SARB, CBS,the
CSOSARB,
and
STATSSA . and
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
May-16
May-08
May-10
May-12
May-14
Sep-07
Sep-09
Sep-11
Sep-13
Sep-15
CBS, CSO and STATSSA.

-2.00
A case in point is what was noted in 2016, the Swa
-4.00
South African
Central Bank real policy
of Swaziland © 2018rate was positive
infl_diff SW_nom_int SA_nom_int Page
119
throughout the year reflecting a restrictive
Source: Authors calculations using data from the SARB, CBS, CSO and Central Bank Of Swaziland © 2018
STATSSA. monetary policy as headline inflation stayed
Of important note though; is the implied policy
A case in point is what was noted in 2016, the In 2016, the common shock was the El’nino
South African real policy rate was positive induced drought and it affected both
throughout the year reflecting a restrictive countries but for Swaziland it raised food
monetary policy as headline inflation stayed prices by more than 5 percentage points
outside the South African Reserve Bank target from those of South Africa arguably because
range of 3-6 per cent. However, Swaziland’s of supply bottlenecks in Swaziland. From
real policy rate was consistently negative the demand side, the paper notes that in the
reflecting a relatively looser monetary second half of the year; the expansionary
policy stance even in a period of elevated fiscal policy particularly adjustment in public
inflation. This can also explain the inflation wages following the implementation of the
differentials observed during this period. salary review created inflationary pressures
which may have fed through to the widening
On the basis of this analysis it important of inflation differentials between Swaziland
that the Central Bank factors in inflation and South Africa. This was further worsened
differential in its policy reaction function by a relatively looser monetary policy when
in order to ensure real convergence and considering real policy rates movements.
harmonize policy stances within the currency The traditional culprit in explaining inflation
union. differential - differences in CPI weights -
only explained 40 percent of the recent
CONCLUSION differential. The paper recommends that
The analysis of inflation differential remains inflation differential be taken into account
an important subject of interest for countries in the monetary policy reaction function so
in a currency union so as to ensure harmony as to correct for real convergence in policy
of monetary policy stances and hence the rates and thereby harmonize monetary
viability of the union itself. This paper policy stances within the union.
studied inflation differentials between
Swaziland and South Africa and implications REFERENCES
for monetary policy in Swaziland. The paper Braun, W., 2010. Inflation Differentials,
studies long-term convergence and short- Price Differentials and Convergence in
run dynamics using the PPP model. The the Eurozone.
results showed that relative PPP holds for [Online] Available at: https://www.
Swaziland and South African inflation rates amherst.edu/media/view/329608/
and that there is high contemporaneous pass- original/Braun-InflaDiffer,
through effect from South African prices to PrizeDiffer,ConverEurozone.pdf.
Swaziland’s prices. These results support Carolina, M. G., 2006. PPP Theory in a
that the currency union remains viable and Fixed Exchange Rate System, Antillen:
relevant for Swaziland. BNA Working Paper/06/02.
Disaggregating inflation differentials Coakley, J. & Snaith, S., 2004. Testing for
between tradables and non-tradables reflect Longrun Relative Purchasing Power
that recent inflation differentials (in 2016) Parity in Europe, Colchester, UK:
mainly came from the tradeable sector University of Essex.
which reflected the violation of the law of
one price between the two countries. From Coudert, V., 2004. Measuring the Balassa-
the supply side, the paper noted that; even Samuelson Effect for Countries
though Swaziland and South Africa faced of Central and Eastern Europe.
similar shocks, the results and adjustment Banque de France Bulletin Digest,
mechanism to the shocks were asymmetric. February(122), pp. 23-43.

De Boef, S., 2000. Modelling Equilibrium Rabanal, P., 2008. Inflation Differential in
Relationship: Error Correction Models a Currency Union: A DSGE Perspective.
with Strong Autoregressive Data. Tarragona, Centre for Economic Policy
Political Analysis, 9(1), pp. 78-94. Research (CEPR), pp. 1-45.
Dedu, V. & Dumitrescu, B. A., 2010. The Ridhwan, M. M., 2015. Inflation
Balassa-Samuelson Effect in Romania. Differentials, Determinants and
Romanian Journal of Economic Convergence: Evidence from Indonesia
Forecasting, Volume 4, pp. 44-53. Sub-National Data. Kuala Lumpur, The
Journal of Developing Areas, pp. 108-
Haan, J. d., 2010. Inflation Differentials 130.
in the Euro Area: A Survey. In: The
European Central Bank at Ten. Berlin: Taylor, A. M. & Taylor, M. P., 2004. The
Springer-Verlag, pp. 11-32. Purchasing Power Parity Debate,
London: Centre for Economic Policy
Mihaljek, D., 2002. The Balassa-Samuelson Research.
Effect in Central Europe: A
Disaggregated Analysis. Budapest, Wang, J.-Y., Masha, I., Kazuko, S. &
Bank for International Settlements. Leighton, H., 2007. The Common
Monetary Area in Southern Africa:
Miletic, M., 2012. Estimating the Impact Shocks, Adjustment and Policy
of the Balassa-Samuelson effect Challenges, African Department: IMF
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Counries: A Revised Analysis of
Panel Data Cointegration Tests. Wickremasinghe, G., 2004. Purchasing
PANOECONOMICUS, Volume 4, pp. 475- Power Parity Hypothesis in Developing
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Victoria: Monash University Caulfield.

121
Rand-Dollar Price Fixing Effect 1.0 INTRODUCTION

and Policy Recommendation In February 2017, the Competition
Commission of South Africa uncovered that
Ntobeko S. Dlamini18 a number of banks were fixing the price of
the exchange rate between the US dollar
Abstract and the Rand. The banks, as alleged by
the commission, ‘had generally agreed (in
This paper provides an analysis of the effect 2007) to collude on prices for bids, offers
of price fixing of the rand dollar exchange and bid-offer spreads for the spot trades in
rate by various commercial banks in both the currency trade arena’. In the wake of
the United States and South Africa as cited these findings South Africa’s economy had
by the Competition Commission of South grappled under a volatile rate of exchange
Africa. On the basis that the Bank’s inflation between the Rand and the US dollar which
model feeds into the country’s monetary when viewed backwards, such an act has far
policy, this paper sought to establish the reaching economic implications not only for
relationship and impact of the exchange rate South Africa but for the satellite economies
on the domestic inflation over the period found in the Common Monetary Area (CMA).
in which the said collusions are presumed
to have occurred using the ordinary least The CMA which is premised on the idea of
squares (OLS) regression method. From the a coordinated monetary policy in keeping a
results, the paper found that exchange rate low and stable level of inflation links South
had a positive impact on domestic inflation. Africa, Swaziland, Namibia and Lesotho into
Therefore, this paper recommends that the a monetary union (Ikhide and Uanguta, 2010).
proceeds from penalty or fine imposed by the As such, the monetary policy formulation
commission on the banks be shared among becomes the product of a country’s
CMA members using specified formulae of membership into the agreement. According
revenue sharing. to the agreement, a member country’s
currency (e.g. Lilangeni, Namibian dollar &
Key Words: Price Fixing, Exchange Rate, Loti) is pegged at par with the South African
Inflation, Swaziland, OLS. Rand and further allows for free movement
of the Rand in their respective economies. In
order to preserve the credibility of the fixed
parity an import coverage for a specified
period is required from the members.
The banks named in the investigations are

Bank of America Merrill Lynch International
Limited, BNP Paribas, JP Morgan Chase &
Co, JP Morgan Chase Bank NA, Investec Ltd,
Standard New York Securities Inc, HSBC Bank
Plc, Standard Chartered Bank, Credit Suisse
Group. Others are Standard Bank of South
Africa Ltd, Commerzbank AG; Australia and
New Zealand Banking Group Limited, Nomura
Ntobeko Dlamini is an Economist, Modelling and
18 International Plc, Macquarie Bank Limited,
Forecasting, in the Policy Research and Macroeconomic ABSA Bank Limited (ABSA), Barclays Capital
Analysis at the Central Bank of Swaziland.,reachable Inc, Barclays Bank plc (Respondents).
at Ntobekod@Centralbank.org.sz.

QUARTZ Africa (2017) reveals that the The rapid increase in the consumer price
collusion was a global effort as banks across inflation in the first half of 2008 was driven by
four continents worked together to distort most notably a rise in oil prices, international
the currency market. The banks are alleged commodity prices and domestic food prices.
to have used the Reuters currency trading The weakening of the Lilangeni/Rand
platform, Bloomberg instant messaging exchange rate aggravated by rising inflation
services and telephone calls to organize in South Africa also contributed to further
appropriate trading times, prices and taking increases in the domestic consumer price
turns to transact, hold or pull bills. As a inflation as imported inflation, given that
result, these colluded trades would affect the country imports over 90 per cent of its
anyone buying Rands or using US Dollars to goods from South Africa.
buy Rand (QUARTZ Africa, 2017).
Conversely, the downturn in inflation over
In essence, the act of collusion by the banks the subsequent periods can be attributed
can be transmitted through various channels to reductions in international oil prices and
of economic activity which include inflation, the strengthening of the Lilangeni/Rand
foreign debt, trade and gross reserves exchange rate. The overall inflation is seen
resulting in a misdirected policy stance to have moderated in line with a moderation
by the various policy institutions of the in the volatility in the Lilangeni/Rand
member countries. As a member of the CMA, exchange rate between fourth quarter 2009
Swaziland is not spared from the envisaged and first quarter 2011.
brunt of these currency distortions. This As oil prices increases began to emerge
paper therefore provides a brief review coupled with a depreciation of the Lilangeni/
of the relationship between exchange Rand exchange rate against the U.S dollar,
rate movements and the major economic petrol prices also rose sharply. This saw
indicators in Swazilandmindful of the date transport inflation increasing to almost
in which the Rand-Dollar manipulation took 15 per cent in the first quarter of 2012.
place. Throughout the remainder of the review
period, overall inflation remained relatively
1.1 Inflation and Exchange Rate low and such developments were largely
By the dawn of the 2007/2008 financial crisis, attributed to lower food and transport
Swaziland’s overall rate of inflation had prices which minimised the effects of the
skyrocketed to double digits and maintained continued weakening of the local currency.
an upward trajectory for the first three
quarters of 2008. Having averaged a high of Exchange rate depreciation(appreciation)
13.9 per cent in the third quarter of 2008, by nature may quicken or gradually lead
the consumer price inflation thereafter to a rise (fall) in consumer price inflation.
rapidly decelerated in the subsequent years The analysis presented by Figure 1 shows
but still averaged around 5 and 9 per cent stronger historic cases of the relationship
over the period 2009 and 2014. Up until the between inflation and the exchange rate.
fourth quarter of 2014, Swaziland’s overall For instance, between the first quarter of
consumer price inflation had remained at 2009 and second quarter 2011 the consumer
single digits showing that the monetary price inflation is found to be decreasing
policy has been effective in curtailing consistent with an appreciation of the local
undesirable levels of inflation. Accounting currency. On the other hand, between the
for these developments (in inflation) were fourth quarter of 2013 and fourth quarter
a combination of domestic and external 2014 a depreciation coincides with a rise in
factors. the rate of inflation.

123
currency. On the other hand, between the fourth
Pu
2008 2009 2010 2011 2012 2013 2014
quarter of 2013 and fourth quarter 2014 a Public External Debt Exchange rate
depreciation coincides with a rise in the rate of Source: Central Bank of Swaziland
inflation.
By the end of the fourth quarter of 2010,
Figure 1:
1: Exchange
ExchangeRate
Rate
andand Inflation
Inflation in in Swaziland’s grossappreciation
driven by the external outstanding debt had
in the exchange
Swaziland value of athe
followed Lilangeni
declining exchange
trend rate.at E2.5
which closed
40.0 12.0
billion. The downward movement in foreign debt
Exchange Rate(E/US$)
Inflation Rate(%)
30.0 10.0
The downward trajectory (appreciation) in
8.0 as
20.0
6.0
theshown in Figure
exchange was2 thus
was mainly drivenfor
a benefit by debt
the
10.0
4.0 servicing obligations
appreciation given that
in the exchange value external
of the
0.0 2.0 debt for central
Lilangeni government
exchange constitutes
rate. The downwardthe
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Sept
Sept
Sept
Sept
Sept
Sept
Sept
-10.0 0.0 largest share of total loans portfolio. On the
trajectory
other hand,(appreciation) in thedepreciation
the substantial exchange wasof
2008 2009 2010 2011 2012 2013 2014 Research Bulletin Volume 2
Transport Inflation
Food Inflation the Lilangeni
thus a benefit forfrom June 2011
debt servicing to December
obligations given
2014 external
coupled debtwith increases the reduct
for centralin government
drawdowns
Overall Inflation
Exchange rate that
on Trade
1.3 existing
andprojects
Exchangeresulted
Rates in the drastic import bi
Source:
Source: Central
Central Bank Bank of Swaziland
of Swaziland constitutes
increases the largest
in external share of total loans
debt.
Under normal circumstances, a weaker domestic quarter-on
portfolio. On the other hand, the substantial
1.2
1.2 Foreign
ForeignDebt
Debtand
andExchange
ExchangeRate
Rate currency boosts growth in export earnings while substantia
1.3 Trade
depreciation and Exchange
of the LilangeniRates
from June 2011 to
Though expressed
Though expressedin inEmalangeni
Emalangeni terms,
terms, the Under normal
discouraging circumstances,
imports. In the case of aSwaziland,
weaker imports g
the country’s foreign debt position is a December 2014 coupled with increases in
rch Bulletin Volume
country’s 2 foreign debt position is a function of domestic currency boosts growth in export
function of exchange rate developments and trade activity is almost entirely catered for by the Over the
ed denominated
exchange rateexternal liabilities,
developments for instance,
andexternal
drawdowns a
on earnings while
drawdowns discouraging
on existing projectsimports. In the
resulted in the
drawdowns on the existing loans. neighbouring South Africa to which the Rand and weakened
case of Swaziland, trade
drastic increases in external debt.activity is almost
re For dollar
depreciate
the ofdenominated
existing the external external
local unit against
loans. the liabilities,
ForUS dollar
dollar entirely are
Lilangeni catered
fixed onfora one-on
by theone neighbouring
basis. As a 2014 to E1
for instance, a depreciate of the local
ort would
Central lead
Bank to a rise in ©
of Swaziland outstanding
2018 foreign debt, South Africa to which the Rand and Lilangeni 142 |
unit against the US dollar would lead to a result, more than 80 per cent of the country’s the dollar.
he
Page
and the reverse is true. As seen in the figure are fixed on a one-on one basis. As a result,
rise in outstanding foreign debt, and the imports come 80from
more than perSouth
centAfrica.
of theOn the other
country’s
reverse is true. As seen in the figure
below, outstanding external debt over the review below,
imports
hand, morecome
than from
half ofSouth Africa. exports
the country’s On the 1.4 Gross
outstanding external debt over the review
period has been mimicking the movements in the other hand, more than half of the country’s
by period has been mimicking the movements (approximately 60%) are destined for the South Rates
exchange rate. exports (approximately 60%) are destined for
in the exchange rate. African market with market
the remainder accounted for The curre
se the South African with the remainder
sis
accounted
by forthe
the rest of by world.
the rest of therefore
This the world. This
means reserves is
Figure 2:
Figure 2: Exchange
ExchangeRate
Rateand
andPublic
PublicExternal
External
Debt
DebtininSwaziland
Swaziland therefore means that a percentage of the
ric that a percentage of the developments in the USD and
4,000 12.0 developments in the country’s trade arena
country’s
would betrade arena would be susceptible to other fore
Exchange Rate (E/US$)
nd 3,500 10.0 susceptible to changes in the major

Public External Debt (E'Million)
3,000
rst 2,500 8.0 tradingincurrencies.
changes the major trading currencies. expected t
2,000 6.0
he 1,500 4.0
Figure
Figure 3:3:Exchange
Exchange RateTrade
Rate and and Trade gross reser
1,000 Developments in Swaziland
Developments in Swaziland
ng 500 2.0 be affected
7,000.0 12.0
- 0.0
Exports & Imports (E'Million)
cal 6,000.0 10.0 movement

Mar
Mar
Mar
Mar
Mar
Mar
Mar
Sept
Sept
Sept
Sept
Sept
Sept
Sept
5,000.0
th 8.0 reflects on
2008 2009 2010 2011 2012 2013 2014 4,000.0
6.0
a Public External Debt Exchange rate 3,000.0 Between t
4.0
2,000.0
of Source:
Source: Central
Central Bank
Bank of of Swaziland
Swaziland 1,000.0 2.0 quarter 20
- 0.0 high of E7
By
By the
the end
end of
of the
the fourth
fourth quarter
quarterofof 2010,
2010,
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Sept
Sept
Sept
Sept
Sept
Sept
Sept
Swaziland’sgross
gross external outstanding debt respectivel
in Swaziland’s external outstanding debt had 2008 2009 2010 2011 2012 2013 2014
had followed a declining trend which closed Imports Exports Exchange rate partly due
followed a declining trend which closed at E2.5
0 at E2.5 billion. The downward movement in Source: Central Bank of Swaziland of the Rand
billion.
foreignThe downward movement in2foreign debt

0 debt as shown in Figure was mainly
currencies
as shown in Figure 2 was mainly driven by the As seen in Figure 3, Swaziland experienced an
appreciation in the exchange value of the
most of the
improved export performance which saw a
from go
124
Lilangeni exchange rate. The downward positive trade balance almost being maintained
Central Bank Of Swaziland © 2018 especially
trajectory (appreciation) in the exchange was throughout the period under review. Accounting,
Southern A
Research Bulletin V
Figure 4: Exchange Rate and Reserves in rese

As seen in Figure 3, Swaziland experienced Figure 4: Exchange Rate and Reserves in
Swaziland imp
an improved export performance which Swaziland
saw a positive trade balance almost being 9,000 14.0
Ove
8,000
Exchange Rate (E/US$)

maintained throughout the period under 12.0
Reserves (E'Million)
7,000
review. Accounting, in part, for the positive 10.0 resp
6,000
development in the trade account was a 5,000 8.0 also
depreciation of the local currency when 4,000 6.0
3,000 stab
compared to major trading partners and 2,000
4.0
the reduction in oil prices (which reduced 1,000 2.0 fina

the import bill). By the end of December - 0.0 grow
March
March
March
March
March
March
March
Sept
Sept
Sept
Sept
Sept
Sept
Sept
2014, quarter-on-quarter exports improved
mac
substantially to an estimated E5.87 billion,
2008 2009 2010 2011 2012 2013 2014 use
while imports grew considerably above
Gross Official Reserves Exchange Rate(EP)
E4.5 billion. Over the same period, the con
Lilangeni had weakened from E10.87 in the Source: Central Bank of Swaziland
the
first quarter of 2014 to E11.21 in the fourth
Consistentwith
Consistent with a sharp
a sharp declinedecline of the
of the Lilangeni Ulti
quarter of 2014 to the dollar.
Lilangeni against the dollar in the period
against the dollar in the period between 2012 to infla
between 2012 to 2014, reserves accelerated
1.4 Gross Official Reserves and Exchange 2014, reserves
from a low of accelerated
E3.8 billionfrom a low 2012
in March of E3.8to of i
Rates
E8.0 billion
billion in December
in March 2012 to E8.0ofbillion
2014.inDespite
Decemberthe and
The currency composition of the country’s
positive outcome on the country’s reserves,
reserves is kept at approximately 60% of 2014. Despite the positive outcome on the be i
it is important to note that in 2014 the
ZAR, 25% USD and the rest comprises of
country’s
Lilangenireserves, it is important
had performed badly toin note that in
comparison rate
the numerous other foreign currencies.
to thethe
2014 major currencies
Lilangeni specifically
had performed the in
badly US
Consequently, it is expected that a sizeable
dollar. This
share of the country’s gross reserves comparison to the major currencies specifically
especially those held in dollars will be rela
the
2.0USPolicy
dollar. Implication: The Inflation
affected by either an upward or downward the
movement of the value of exchange which Model
2.0 Policy Implication: The Inflation Model pre
also reflects on the country’s level of import Swaziland together with other members
cover. Between the first quarter of 2009 and Swaziland
of the CMA together
the LNSwithcountries
other members
adopted of the
the stud
second quarter 2011 gross official reserves fixed the
CMA exchange rate targeting
LNS countries adopted system
the fixed to infla
fell from a high of E7.5 billion and a low of monetary policy implementation. Under this
exchange rate targeting system to monetary Dlam
E3.4 billion respectively. Contributing to the system, government and the Central Bank
decline was partly due to an appreciation policy
have tied implementation. Under this
the official exchange ratesystem,
at par the
in the external value of the Rand/Lilangeni with the South African Rand. In this
government and the Central Bank have tied the regard, doll
exchange rate to the major currencies most the intermediate objective of the monetary
official exchange rate at par with the South and
importantly, due to the fact that most of the policy in Swaziland is to maintain the fixed
fluctuations in the reserves emanates from exchange
African rate
Rand. In between
this regard,the
theLilangeni and
intermediate infla
government budgetary obligations especially the Rand.
objective Thismonetary
of the requirespolicy
thatinthe country’s
Swaziland is Janu
because of the revenue from the Southern currency be backed by the international
to maintain
reserve the fixed exchange
requirement rate between
standard the
of a three
African Customs Union (SACU) which add to Fro
reserves yet they are then allocated towards months import
Lilangeni and thecover.
Rand. This requires that the
Ord
the national fiscus. country’s currency be backed by the international
con
Page

125
Over and above the fixed exchange rate Instead of using a dummy variable which
responsibility, the Central Bank of Swaziland would have helped to capture the difference
is also tasked with the responsibility of in time events before and after the alleged
maintaining stable and low prices (inflation) collusion, the paper specifically focuses on
and a sound financial system that will ensure the period within which the crime is alleged
sustainable growth in the economy. Informed to have been committed. Once the statistical
by a number macroeconomic variables the significance of the variable of the Rand/
Central Bank thus uses the discount rate Lilangeni exchange rate is determined we
to influence monetary conditions in the shall analyse the regression outcome under
country, which almost mimics the South the pretence that the manipulation had an
African Reserve Bank’s repo rate. Ultimately, impact on the consumer price inflation in
the Bank monitors developments in inflation Swaziland but still subject to the enquiry’s
and guards against any undesirable rates of outcome in South Africa.
inflation by responding with an appropriate
and effective monetary policy action that Table 1: Long-run regression results
would be in the form of a manipulation of Variable Coefficient Std. t-Statistic Prob.
the discount rate. Error
LOGCPI_SA 0.87243* 0.09826 8.8784 0.000
This section therefore seeks to establish the
relationship and impact of the exchange LOGEXR_ 0.620057* 0.04225 14.673 0.000
rate over the period in which the said USD
collusions are presumed to have occurred. LOGOIL_ 0.172665* 0.02431 7.1014 0.000
PRIC
From previous studies that have investigated
the determinants of inflation in Swaziland C -1.50135* 0.45176 -3.3276 0.001
(Ndzinisa, 2008: Dlamini & Dlamini, 2001), R-squared 0.800614 S.E
the magnitude of the impact of the Rand/ 0.058032
Lilangeni exchange rate to the US dollar, Adjusted R-squared 0.793137
South Africa’s consumer price inflation and *=1%,**=5%,=***=10%
oil prices on the consumer price inflation(CPI_
SD) in Swaziland over the period January The positive coefficient of the exchange
2008 to December 2014. rate as depicted by Table 1 is found to be
significant a 1 percent level signifying that a
From the preceding variables, the following depreciation in the Rand/Lilangeni exchange
Ordinary Least Squares (OLS) model is rate against the US dollar over the period in
constructed: question was inflationary. If there is concrete
evidence that these banks infiltrated the
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆𝑡𝑡 = 𝛽𝛽0 + 𝛽𝛽1 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆𝑡𝑡 currency market by altering the forces of
0.058032
Research Bulletin Volume 2 supply and demand, then a depreciation
+ 𝛽𝛽2 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑈𝑈𝑈𝑈𝑈𝑈𝑡𝑡 in the RandR-squared
Adjusted which is transferrable 0.793137 to the
_𝑆𝑆𝑆𝑆𝑡𝑡 + 𝛽𝛽3 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 peripheral
0.058032 economies
*=1%,**=5%,=***=10% of the CMA is a cause
Research 𝑡𝑡 + 𝜇𝜇𝑡𝑡 Volume
Bulletin Research2 Bulletin Volume 2
Research Bulletin for concern
Volume
The 2 about the future stability and
𝑈𝑈𝑈𝑈𝑡𝑡 Research Bulletin Volume 2 positive coefficient of the exchange rate as
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆
where 𝑡𝑡𝛽𝛽=denotes
𝛽𝛽 + 𝛽𝛽Adjusted
0denotes 1 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆 the elasticity
=R-squared
𝛽𝛽0 + coefficients,
𝑡𝑡 𝛽𝛽coefficients, 0.793137 credibility of the monetary 0.058032 policy stances0.058032
where 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆 = the
𝛽𝛽 elasticity
𝑡𝑡+ 𝛽𝛽 1 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆𝑡𝑡𝜇𝜇𝑡𝑡 the
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆 0.058032
𝑃𝑃𝑃𝑃𝑃𝑃𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆 *=1%,**=5%,=***=10% that depicted
have been by Table
taken 1 is
and/or found
will to pursued
be be significant a 1
𝑡𝑡 + 𝜇𝜇𝑡𝑡 the error 𝑡𝑡 = 𝛽𝛽term, 0 + 𝛽𝛽1 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑆𝑆𝑆𝑆𝑡𝑡 is South Africa
𝑡𝑡 0 1 𝑡𝑡 0.058032
+ 𝛽𝛽2 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑈𝑈𝑈𝑈𝑈𝑈 + 𝛽𝛽
𝑡𝑡 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑈𝑈𝑈𝑈𝑈𝑈 byR-squared
the countries in the union. Hence,
error term, price The
𝐶𝐶𝐶𝐶𝐶𝐶_𝑆𝑆𝑆𝑆 𝛽𝛽𝑡𝑡positive
is South 2 coefficient
Africa consumer of𝑡𝑡 the exchange
Adjusted rate as R-squared
0.793137
consumer + 𝛽𝛽2+ index, 2 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑈𝑈𝑈𝑈𝑈𝑈𝑡𝑡 is the local
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑈𝑈𝑈𝑈𝑈𝑈 𝑡𝑡
percent
Adjusted
imposing
*=1%,**=5%,=***=10%
level
Adjusted
R-squared
a set
signifying
of restraints
that a 0.793137
0.793137 depreciation
against such
in the
+ 𝛽𝛽 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 + 𝜇𝜇 Adjusted R-squared
*=1%,**=5%,=***=10% 0.793137
ficients,
priceunit the 𝐸𝐸𝐸𝐸𝐸𝐸_𝑈𝑈𝑈𝑈𝑈𝑈
𝜇𝜇index,
𝑡𝑡 against 3 the depicted USD, is+andby𝛽𝛽3Table
the
+𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑡𝑡local
𝛽𝛽3 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑡𝑡unit
1 𝑡𝑡is+against
found
𝜇𝜇𝑡𝑡 𝑡𝑡 The
+to 𝜇𝜇𝑡𝑡be significant
isthe a 1exploitexchange
*=1%,**=5%,=***=10%
Rand/Lilangeni rate against
the international + 𝛽𝛽3 price of oil. 𝑡𝑡For estimation + 𝜇𝜇 𝑡𝑡
unscrupulous
positive coefficient
*=1%,**=5%,=***=10%
The positive becomes
of the exchange
coefficient aofrelevant
rate as the US
the exchange rate a
rica USD, consumerand percent
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 level
is the signifying
international that a depreciation
price The The positive
necessity.
positivein the coefficient
coefficient of theof the exchange
exchange rate rate
as as
𝛽𝛽 denotes purposes,
where the elasticity
𝛽𝛽thedenotes datacoefficients,
series
the is transformed
𝑡𝑡 elasticity the
𝜇𝜇𝑡𝑡 coefficients, into
depicted dollar
𝜇𝜇𝑡𝑡 theby Table over
1 is foundthe toperiod
be in question was
where 𝛽𝛽 denotes the elasticity coefficients, 𝜇𝜇 the depicted by Table 1 significant
is found to abe 1 significant a
unit
hereof against
𝛽𝛽 oil.
denotes
natural Fortheestimation
the elasticity
logarithms. Rand/Lilangeni coefficients,
purposes, exchange
the data𝜇𝜇𝑡𝑡 the 𝑡𝑡
series rate is depicted
against
depicted the
by by
US
Table Table
1 is 1 is found
found to betosignificant
be significant
a 1 a1
term, 𝐶𝐶𝐶𝐶𝐶𝐶_𝑆𝑆𝑆𝑆error 𝑡𝑡 term, is South 𝐶𝐶𝐶𝐶𝐶𝐶_𝑆𝑆𝑆𝑆 Africa𝑡𝑡 is South
consumer Africa percent consumer inflationary.
level signifying Ifthat
there is concreteinevidence
a depreciation the that
error term, 𝐶𝐶𝐶𝐶𝐶𝐶_𝑆𝑆𝑆𝑆 is South Africa consumer percent level signifying that a depreciation in th
rnational
ror transformed price
term, 𝐶𝐶𝐶𝐶𝐶𝐶_𝑆𝑆𝑆𝑆 into𝑡𝑡 is
dollar
𝑡𝑡
naturalSouth over Africa
logarithms. the consumerperiod in percent
question
percent level level
was signifying
signifying that that
a a depreciation
depreciation in in
the the
ndex, 𝐸𝐸𝐸𝐸𝐸𝐸_𝑈𝑈𝑈𝑈𝑈𝑈 is the𝐸𝐸𝐸𝐸𝐸𝐸_𝑈𝑈𝑈𝑈𝑈𝑈
local unit isagainst theunit against the theseRand/Lilangeni
banks infiltrated the currency market by
126
price index, the local Rand/Lilangeni exchange rateexchange
against the
rate US against the U
price index, 𝐸𝐸𝐸𝐸𝐸𝐸_𝑈𝑈𝑈𝑈𝑈𝑈 is the local unit against the Rand/Lilangeni exchange rate against
eicedata index,series is
𝐸𝐸𝐸𝐸𝐸𝐸_𝑈𝑈𝑈𝑈𝑈𝑈 is the local unit againstisthe the the US
nd 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
USD, and 𝑡𝑡 isinflationary.
the international
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
If there
is the price concrete
international dollar
evidence
Rand/Lilangeni
price altering
over the
that
theexchange
forces ofinrate
period supply against
and demand,
question was
USthen a
USD, Instead
and of using a dummy
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 is the variable
𝑡𝑡 international which price would dollar over the period in question was wa
dollar over the period in question
s.
D, and 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙_𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 is the international price 𝑡𝑡
The results as shown in the Table 1 also 3.0 CONCLUSION AND POLICY
indicate that there exists a statistically RECOMMENDATION
significant positive link between the The purpose of this paper was to examine
consumer price inflation of South Africa, oil the link and/or the relationship between the
prices and the consumer price inflation of exchange rate and the different economic
Swaziland. The magnitude of the coefficient indicators in Swaziland with special focus
implies that a percentage point increase in on the time period in which the Rand-
South Africa’s consumer price inflation over Dollar manipulations occurred. It further
the period under review resulted in a 0.87 demonstrated through a simple regression
per cent increase in the dependent variable analysis, that prices in South Africa which
(inflation). In recognition of this economic are informed by the exchange rate and
fundamental, Swaziland’s inflation is to the actual exchange rate itself do become
a large extent influenced by the price transferred to the domestic economy.
developments in South Africa, to which a
significant component of the goods procured Key towards this discussion, therefore,
by the domestic economy comprises is that the impact of the manipulations,
imported inflation. the outcome and the mitigating action to
restore order as it will be instituted by the
Table 2: Long-run Cointegration commission, should not be viewed in isolation
intercept intercept none of the South African economy but should
& trend
take cognisant of the fact that the CMA
ADF test statistic -2.401 -2.984 -2.419***
links South Africa with the LNS countries to
ADF test critical -2.586 -3.159 -1.614 which their currencies are pegged at parity
values
***-represents statistical significance at 10%.
with the Rand. Hence, given that these
peripheral economies are extremely open to
While the long run regression results in trade with South Africa, the transferability
revealed statistical significance of the of the impact of the distortion is inevitable.
variable under review, the robustness of the Thus pending the outcome of the enquiry
findings is thus confirmed by the significance this paper will assume the following policy
of the residuals through the long run recommendations:
cointegration.
zz Other CMA Member countries should
2.1 The Status of the Investigations conduct studies to examine the extent to
The Competition Commission of South Africa which such collusions might have affected
has since referred the matter to the Tribunal the conduct and implementation of their
where the commission seeks an order macroeconomic policies.
declaring that the seventeen banks indeed
contravened South Africa’s Competition zz That the proceeds from penalty or fine
Act. Upon establishing beyond reasonable imposed by the commission on the banks
doubt that the banks had conspired to be shared among CMA members using a
influence market forces, the commission specified formulae of revenue sharing
will thereafter impose a penalty of 10 per as imposed by the Southern African
cent on their annual turnover. Customs Union. The funds may also be
incorporated as additional payment when
seigniorage compensation payments are
made to LNS countries.

127
zz The CMA should also come up with policies LNS Economies. Journal of Economic
tailored to safeguard the credibility and Integration 25(2), 324-352.
relevance of the institution and where
there are loop-holes the union should Ndzinisa P. (2008). Efficacy of Monetary
be ready to respond appropriately Policy on Economic Growth in
especially if such a case were to present Swaziland, Central Bank of Swaziland,
itself again. Mbabane.
REFERENCES Quarterly Reviews (2007-2015). Central

Bank of Swaziland, Mbabane.
Dlamini A.M, Nxumalo T., & Dlamini A.D.
(2001). A Cointegration Analysis of the QUARTZ Africa (2017). https://
Determinants of Inflation in Swaziland, qz.com/986672/dr-tedros-adhanom-
Central Bank of Swaziland, Mbabane. ghebreyesus-the-top-candidate-to-
lead-the-world-health-organization-
Ikhide S. & Uanguta E. (2010). Impact of is-being-accused-of-covering-deadly-
South Africa’s Monetary Policy on the outbreaks-of-cholera-in-ethiopia/


129
For more information, contact:
The Economic Policy, Research and Statistics Department

Central Bank of Swaziland
Mahlokohla Street
P.O. Box 546, Mbabane, Swaziland
Tel: (+268) 2408-2243 Fax: (+268) 2404-0038
130
E-mail: research@centralbank.org.sz
Website: www.centralbank.org.sz

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C E N T R A L B A N K O F S WA Z I L A N D | RESEARCH BULLETIN VOLUME 2

ECONOMIC POLICY, RESEARCH AND

MARCH, 2018 Central Bank Of Swaziland © 2018

ii Central Bank Of Swaziland © 2018

CENTRAL BANK OF SWAZILAND

ECONOMIC POLICY, RESEARCH

Central Bank Of Swaziland © 2018

2 Central Bank Of Swaziland © 2018

Author(s) Topic Page

Patrick Ndzinisa and Determination of an Optimal Public Debt Threshold Level 4

Simiso F. Mkhonta Discount Rate Differential Monetary Policy Decisions in 16

Bongani P. Dlamini An Assessment of the Impact of Fiscal policy on Output in 24

Sikhumbuzo S. Dlamini, The Efficacy and Potency or Paralysis of Monetary Policy 44

Sive Kunene and The Impact of Monetary Policy Changes on Macroeconomic 60

Bongani P. Dlamini Modelling and Forecasting Inflation Dynamics in Swaziland. 87

Welcome N. Nxumalo The Inflation Differential Between Swaziland And 108

Central Bank Of Swaziland © 2018

Determination of an Optimal Public The estimated optimal debt limit is also in

Key words: public debt threshold, economic

4 Central Bank Of Swaziland © 2018

Central Bank Of Swaziland © 2018

2.0 LITERATURE REVIEW may imply higher sovereign yield spreads.

6 Central Bank Of Swaziland © 2018

Central Bank Of Swaziland © 2018

SACU revenue inflows coupled with limited 100 5 𝑦𝑦𝑡𝑡 = 𝛼𝛼0 +

fiscal stress. This is evident in Figure 1 where 0 -5

fiscal balances deteriorated from surpluses -50 -10 𝑑𝑑

8 Central Bank Of Swaziland © 2018

variable. Eq. (2) 0

Without 50 revenues. The 50

-50 the relationship between (𝑥𝑥 1 2

hence -10 crowding out 𝑑𝑑 the

ost 13 per accumulated

of one for suppliers

sector. values variable of 𝑘𝑘, greater

following; corresponding vector of coefficients of 𝑡𝑡 the 0 𝑡𝑡 1 𝑡𝑡 𝑡𝑡 2 𝑡𝑡 𝑡𝑡 0

orrowing𝑦𝑦costs following; coupled 𝛼𝛼with

𝑡𝑡 1, (𝑥𝑥𝑡𝑡 > 𝑘𝑘){

ory variables. 𝜀𝜀 is a random 0 disturbance -50 -5 -5 -10

variables 𝑦𝑦-50 , 𝑥𝑥 and 𝑍𝑍 -100

10 Central Bank Of Swaziland © 2018

5.0 ESTIMATION TECHNIQUES AND public debt as a percentage of GDP. For

Central Bank Of Swaziland © 2018

12 Central Bank Of Swaziland © 2018

Central Bank Of Swaziland © 2018

Common Monetary Area (CMA) counterparts, Checherita, C., Rother, P. (2012).

Baum, A., Checherita-Westphal, C., Rother, Elmendorf, D., Mankiw, G. (1999).

Cecchetti, S., Mohanty, M., Zampolli, F. Mafusire, A. (2015). Assessing Swaziland’s

14 Central Bank Of Swaziland © 2018

Central Bank Of Swaziland © 2018

Discount Rate Differential Monetary investment assets inflows with a p-value of

South Africa, Lesotho, Namibia and

16 Central Bank Of Swaziland © 2018

Central Bank Of Swaziland © 2018

18 Central Bank Of Swaziland © 2018

= 𝐶𝐶 + 𝛽𝛽1 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖−2 + 𝛽𝛽2 𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖−1

20 Central Bank Of Swaziland © 2018

Central Bank Of Swaziland © 2018

CONCLUSION Cuddington.J.T., 1987, Macroeconomic

22 Central Bank Of Swaziland © 2018

Central Bank Of Swaziland © 2018

An Assessment of the Impact brings 20 cents to GDP in the 10-year horizon

24 Central Bank Of Swaziland © 2018