MACROECONOMIC EFFECTS OF CRUDE OIL SHOCKS IN SOUTH AFRICA: A MARKOV SWITCHING INTERCEPTS VAR APPROACH

Purpose- This study examines how fluctuations in crude oil price shocks affect South African macroeconomic indicators. Methodology- The study employed the Markov Switching Intercepts VAR (MSI-VAR) approach to capture the dynamic and nonlinear effects of crude oil prices on key macroeconomic indicators, including real GDP growth, inflation, exchange rates, interest rates, and the current account balance. The study applied two regime models: regime one for times of growth and regime two for times of recession. Based on this framework, macroeconomic indicators were analyzed from 2000 Q1 to 2023 Q4 for their varying responses to oil price shocks. Findings- It is evident that South Africa's economy is susceptible to changes in crude oil prices. A crude oil shock has a negative impact on real GDP growth during economic growth (Regime One). In contrast, oil shocks lead to an increase in real GDP growth during recessions (Regime Two). Moreover, crude oil shocks result in a decrease in inflation across both regimes. A crude oil shock has a positive effect on exchange rates and interest rates in Regime One, but a negative effect in Regime Two. Furthermore, crude oil shocks adversely impact the current account balance in both regimes. Conclusion- Crude oil shocks affect the economy differently depending on the prevailing conditions. Therefore, policymakers must evaluate these conditions and implement suitable policies to reduce adverse effects. Monitoring and responding to changes in the global oil market is crucial for mitigating negative consequences and fostering stability. Keywords: Macroeconomic variables, oil price shocks, Markov Switching Intercepts VAR (MSI-VAR), South Africa JEL Codes: E32, F31, Q43