Examining the Dynamic Nexus of Monetary and Fiscal Policy in South Africa: Evidence from Key Macroeconomic Economic Indicators

This paper examines the dynamic nexus of monetary and fiscal policy in South Africa with evidence from key macroeconomic economic indicators from 2000 quarter 1 to 2022 quarter 3. The Markov-switching dynamic regression is used in the Taylor theoretical framework. The contemplation is what type of monetary and fiscal policy mix in a different state of policy rate or repo rate. There is less attention to the analysis of the impact of fiscal policy macroeconomic variables in a different state of policy rate with the consideration of the lower bound and upper bound rate of inflation. The South Africa Reserve Bank's reaction to fiscal policy macroeconomic variables is significant in different states. Moreover, there is evidence of constant reaction of the South Africa Reserve Bank when inflation is at the lower and upper bound. The increase in the gross domestic product gap and inflation gap results in an increase in the rope rate. The result suggests that the monetary policy provided a supportive policy to fiscal policy macroeconomic variables. However, there is a state that reflects trade-offs in the current monetary and fiscal policy mix reaction. The fiscal policy needs to be adjusted to attain the desired target