Fiscal policy, employment, and output in South Africa: An open economy analysis


  • Mthokozisi Mlilo University of the Witwatersrand
  • Umakrishnan Kollamparambi Associate Professor, University of the Witwatersrand; Faculty of Commerce, Law and Management. University of the Witwatersrand



Employment, Fiscal policy shocks, South Africa, VAR.


We provide strong evidence of a positive shock to government spending on increase in employment (public and private), an appreciation of the real effective exchange rate and deterioration in the trade balance; but it has no effect on output for South Africa during the period 1994:1-2008:4. We also document that positive shocks to net taxes generate an increase in output, private employment and have no effect on public employment; it also leads to a depreciation of the real effective exchange rate and an improvement in the trade balance. An important finding in this study is that the transmission channel between government expenditures and output is not as direct as suggested in the Keynesian doctrine, but is indirectly shown by public employment’s effects on output. We conclude that classical effects are predominant in the South African economy, i.e., only improvements in the supply-side components can be linked to increases in output.

Author Biography

Mthokozisi Mlilo, University of the Witwatersrand

School of economic and Business Sciences, leturer


Afonso, A., & Sousa, R. (2009). The Macroeconomic Effects of Fiscal Policy. ECB Working Paper Series, No. 991.

Attfield, C., & Silverstone, B. (1998). Okun's Law, Cointegration and Gap Variables. Journal of Macroeconomics, 20(3), 625-637.

Bartolini, L., & Lahir, A. (2006). Twin Deficits, Twenty Years Later. Current issues in economics and finance, 12(7).

Baxter, M., & King, R. (1993). Fiscal Policy in General Equilibrium. American Economic Review, Vol.83(3).

Beetsma, R., Giuliodori, M., & Klaassen, F. (2007). The Effects of Public Spending Shocks on Trade balances in the European Union. CEPR Discussion Paper.

Benetrix, A., & Lane, P. (2007). The Impact of Fiscal Shocks on the Irish Economy. IIIS Discussion paper No.287.

Blanchard, & Perotti. (2002). An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. Quarterly Journal of Economics, Vol.4, 1329-1368.

Blanchard, & Quah. (1989). The Dynamic Effects of Aggregate Demand and Supply Disturbances. American Economic Review, 79(September), 655-673.

Breuting, Bruggemann, & Lutkepohl. (2004). Stuctural Vector Autoregressions and Impulse Response Functions. In

H. Lutkepohl & M. Kratzig (Eds.), Applied Times Series Econometrics (pp. 186-196). New York: Cambridge University Press.

Burnside, C., Eichenbaum, M., & Fischer, J. (2004). Fiscal Shocks and Their Consequences. Journal of Economic Theory, 115(1), 89-117.

Calvo, G., & Mishkin, F. (2003). The Mirage of Exchange Rate Regimes for Emerging Market Countries The Journal of Economic Persperctives, 17(4), 99-118.

De Castro, F., & Hernandez de Cos, P. (2006). The Effects of Exogenous Fiscal Policy in Spain.A SVAR Approach. European Central Bank Working Paper Series No. 647.

Deverajan, S., Swaroop, V., & Zou, H. (1996). The composition of public expenditure and economic output. Journal of Monetary Economics, 313-344.

Dornbusch, R. (1976). Expectations and Exchange rate dynamics. Journal of Political Economy, 84, 1161-1176.

Enders, W. (2004). Applied Econometrics Time Series. New York: John Wiley and Sons.

Fatas, A., & Mihov, I. (2009). Why fiscal stimulus is likely to work. Journal of Finance, 12(1), 57-73.

Ferreira, E. (2013). Perspectives Of Administrative Employees On Service Delivery In The Public Sector. Retrieved 27

August, 2015, from ferreira_ej_inaugural %20lecture.pdf?sequence=1&isAllowed=y

Finn, M., G. (1998). Cyclical effects of Government's employment and goods purchases. International Economic Review,Vol.39(3), 635-657.

Fleming, M. (1962). Domestic Financial Policies under Fixed and under Floating Exchange Rates. International Monetary Fund Staff Paper, 9, 369-79. Washington.

Giordano, Momigliano, Neri, & Perotti. (2007). The effects of fiscal policy in Italy: Evidence from a VAR model.

European Journal of Political Economy, Vol.23(3), 707-733.

Gordhan, P. (2009). Annual Report (2008/09). Pretoria: Government of South Africa.

Hamilton, J. D. (1994). Time Series Analysis. Princeton, New Jersey: Princeton University Press.

Hoskins, S. (1999). The experience with trade liberalisation of selected industries in the Port Elizabeth-Utinehage Metropolitan Area. Paper presented at the TIPS 1999 Annual Forum, 19-22 September 1999, Muldersdrift.

Jha, R. (2007). Fiscal Policy in Developing Countries: A Synoptic View. Australia South Asia Research Centre, ASARC Working Paper 2007/01.

Jooste, D., Liu, G., & Naraidoo, C. (2013). Analysing the effects of Fiscal policy in the South African econmy. ERSA Working Paper No. 351.

Kamps, C. (2005). The Dynamic Effects of Public Capital: VAR Evidence for 22 OECD Countries. International Tax and Public Finance, Vol.12(4), 533-558.

Kim, S., & Roubini, N. (2005). "Twin Deficits or Twin Divergence? Fiscal Policy, Current Account, and the Real Exchange Rate in the U.S.". mimeo.

Kneller, Bleaney, & Gemmell. (1999). Fiscal Policy and Growth: Evidence from OECD Countries. Journal of Public Economics, Vol.74, 171-190.

Koohi-Kamali, F. (2010). Public Works and Social Protection. European Union Report on Development.

Koray, F., & McMillin, D., W. (2007). Fiscal Shocks, the Trade Balance, and the Exchange Rate. Louisianna State

University, Department of Economics Working paper Series 2007-05.

Levine, R., & Renelt, D., 1992. (1992). A sensitivity analysis of cross country growth regressions. American Economic Review 82, 942-963.

M'Amanja, D., Morrissey, O., & Lloyd, T. (2006). Chapter 16; Aid and Growth in Kenya: A Time Series Approach. In H. Beladi & E. Kwan Choi (Eds.), Theory and Practice of Foreign Aid (Frontiers of Economics and Globalization, Volume 1 (pp. 313-332): Emerald Group Publishing Limited.

MacDonald, R., & Ricci, L. (2002). Estimation of the equilibrium exchange rate for South Africa. IDEAS.

Manuel, T. (2007). Economic Policy And South Africa's Growth Strategy. Ministry of Finance.

Monacelli, T., & Perotti, R. (2006). Fiscal Policy,the Trade Balance, and the Real Exchange Rate:Implications for International Risk Sharing. CEPR Discussion papers.

Mountford, A., & Uhlig, H. (2002). What are the effects of fiscal policy shocks? CEPR, Working Paper 3338.

Mundell, R. (1963). Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates. Canadian Journal of Economics and Political Science, 29(November), 475-485.

Ocran, M. (2011). Fiscal policy and economic growth in South Africa. Journal of Economic Studies, 38(5), 604-618.

Perkins, P., Fedderke, J., & Luiz, J. (2005). An Analysis Of Economic Infrastructure Investment In South Africa. South African Journal of Economics, 73(2).

Perotti, R. (2002). Estimating the Effects of Fiscal Policy in OECD Countries. European Central Bank Working Paper No. 168.

Perotti, R. (2007). Fiscal Policy in Developing Countries: A Framework and Some Questions. World Bank Policy Research Working Paper, (WPS4365).

Phillips, P. (1998). Impulse response and forecast error variance asymptotics in nonstationary VARs. Journal of Econometrics, 83, 21-56.

Rebei, N. (2004). Characterization of the Dynamic Effects of Fiscal Shocks in a Small Open Economy. Bank of Canada Working Paper 2004-41.

Rezk, E., Avramovich, M., & Basso, M. (2006). Dynamic Effects of Fiscal Shocks upon diverse Macroeconomic Variables: A Structural VAR Analysis for Argentina. Paper presented at the Presented at the XLI Annual Reunion of the Argentine Association of Political Economy, 15-17 November 2006.

Rogoff, K. (1985). The Optimal Degree of Commitment to an Intermediate Monetary Target. Quarterly Journal of Economics,100(4), 1169-1190.

Romer, D. (1993). Openness and Inflation: Theory and Evidence. Quarterly Journal of Economics CVII, 869-904.

SARB. (2002, December). Quarterly Bulletin. South African Reserve Bank, (December). Pretoria.

Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 48, 1-48.

Sims, C. A., Stock, & Watson. (1990). Inference in linear time series models with some unit roots. Econometrica, 58, 113-144.

Su, D., Yucel, M., & Taylor, L. (2003). Fiscal Policy and Output. Federal Reserve Bank of Dallas. Working Paper 0301.

Turnovsky, S. (2000). Fiscal Policy, elastic labour supply, and endogenous growth models. Journal of Monetary Economics, 45(1), 185-210.

Weeks, J. (1999). Commentary: Stuck in low GEAR? Macroeconomic policy in South Africa, 1996-98. Cambridge Journal of Economics, 23(6), 795-811.