Monetary–Fiscal Coordination in South Africa: Aligning the Stars

ABSTRACT Monetary–fiscal policy tensions build‐up when debt is rising and inflation is falling. We introduce the concept of a fiscal‐neutral rate ( fiscal r‐star ) into a two‐agent new Keynesian dynamic stochastic general equilibrium model estimated with South African data. We show two persistent gaps: (i) Monetary r‐star exceeds fiscal r‐star, indicating a misalignment between monetary and fiscal policy, and (ii) market interest rates exceed fiscal r‐star, implying that, without policy action, the risk premium on borrowing will continue to be a drag on growth and debt service costs are likely to crowd out other spending. Our model simulations show that the optimal welfare outcomes are achieved by taking steps to align fiscal r‐star with monetary r‐star, through introducing a credible fiscal anchor.