Financial Stress, Volatility and Economic Activity in South Africa

Abstract

We construct a financial stress index (FSI) and assess its effects on South African economic activity. Stress in the financial markets played a significant role in propagating the effects of the financial crisis and in limiting the effects of monetary policy stimulus. To explore the possibility of policy coordination, we investigate the following questions: Does financial stress impact the monetary policy reaction function? Is there evidence suggesting that monetary policy responded aggressively or passively during periods of elevated financial stress? We begin the analysis by assessing the relationship between global risk as proxied by VIX and South African financial variables. The simple relationship between VIX and some South African financial variables is shown in Figure 10.1 (a) to (f).