How to Minimize the Effect of the Global Financial Crisis on South Africa

Ilse M. Schoeman and Mark A. Petersen


output gap, business cycle, hodrick-prescott filter, ARIMA models, production function, global financial crisis


South Africa is a small open economy that is predominantly driven by international developments. There are a great number of specific factors that prevent our economy from achieving its potential. Accordingly, both our business cycle and outcomes in our financial markets are determined by global events. The global financial crisis (GFC) is an ongoing housing and financial crisis that was triggered by a marked increase in mortgage delinquencies and foreclosures in the U.S. It has had major adverse consequences for banks and financial markets worldwide since it became apparent in 2007. Furthermore, the root of the global financial crisis is financial institutions that underestimate the business cycle. This is the reason why we consider the output gap (a proxy for the business cycle). In this paper, we evaluate the usefulness of alternative estimates of the output gap for predicting the business cycle.

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