MODELLING THE ASYMMETRIC EFFECT OF MACROECONOMIC VARIABLES ON SOUTH AFRICA'S MONEY SUPPLY

Abstract

The management of the money supply holds significant importance as it enables the central bank to effectively exert control over inflationary pressures within the economy. An excessive expansion of the money supply has the potential to result in demand-pull inflation. The objective of this study is to examine the unequal influence of macroeconomic factors on money supply in South Africa, utilising a yearly dataset covering the period from 1971 to 2020. The parameters were estimated in this study using the NARDL bounds cointegration technique. The findings of the study provided empirical evidence supporting the existence of a sustained correlation between the money supply and various macroeconomic indicators. The findings suggest a linear association between GDP and money supply, as the latter exhibits a response solely to negative values of GDP. Consequently, a decline in GDP results in a reduction in the money supply. Moreover, it is worth noting that interest rates exhibit a non-linear impact on the money supply. An increase in interest rates results in a decrease in the money supply, whereas a decrease in interest rates leads to an increase in the money supply. The research findings have substantiated the assertion that the inflation rate exerts a non-linear influence on the money supply. An increase in inflation corresponds to a decrease in the money supply, whereas a decrease in inflation is associated with a reduction in the money supply. The findings of this study provide additional evidence supporting the existence of a linear correlation between exchange rates and the money supply. Specifically, the analysis reveals that changes in the money supply are solely influenced by negative shocks in the exchange rate. Consequently, a reduction in the exchange rate results in an expansion of the money supply. It is imperative for South African policymakers to closely monitor macroeconomic variables, as indicated by this study, as they exert a substantial influence on the determination of the money supply level within the South African economy.