Market Currents and Policy Winds: Sectoral Responses to Monetary and Fiscal Shifts Across Regimes

Purpose: This study investigates how South Africa’s sectoral stock market performance responds to monetary and fiscal policy shifts across two macroeconomic regimes: the pre-inflation targeting (Pre-IT) and the inflation targeting (IT) periods. Design/methodology/approach: Employing a Markov Switching Dynamic Regression (MS-DR) model, the paper explores non-linear and state-dependent relationships between policy instruments (interest rate, money supply, government expenditure, tax revenue, exchange rate, and inflation) and the performance of the industrial, financial, and resource sectors. Findings: The results reveal regime- and sector-specific heterogeneities. In the Pre-IT era, monetary policy exhibited stronger contractionary effects, while fiscal policy had mixed impacts. Under IT, sectoral responses were moderated, with inflation stability supporting industrial and financial sectors during expansions but dampening resource sector performance in recessions. Practical implications: The findings highlight the need for sector-specific and state-contingent policy designs to enhance macroeconomic stability and inclusive growth. Industrial and resource sectors, being more labour-intensive, require tailored support during downturns. Originality/value: This paper contributes to the literature by providing novel evidence on how structural changes in policy regimes affect the transmission of macroeconomic policies to different stock market sectors in South Africa.