Acta Universitatis Danubius. Œconomica, Vol 16, No 1 (2020)

Monetary Policy, Human Capital and Productivity in South Africa: An Empirical Analysis

Akinola Gbenga Wilfred, Mishelle Doorasamy


South African has been striving to apply monetary policy that is conducive to productivity in the economy, but the latter has remained elusive. Human capital development in the country has also been a problem with a huge mismatch between the economy’s needs and skills available. Whilst monetary policy operate through transmissions that affect investments, it is not clear how monetary policy, investment in human capital, as well as productivity are interdependent in South Africa.  In this paper, we explore this interdependence using the vector autoregressive (VAR) methodology. Data for South Africa, covering the period 1980–2016 on changes in money supply, productivity and human capital were used to explore the interdependence.  The null hypothesis of this study (H0) is that there are no linear interdependencies among human capital, monetary policy and productivity in South Africa. The key questions of focus in this paper that are of interest to policy makers are 1) how fast do productivity respond to changes in human capital development and monetary policy in South Africa is considered in the model. 2)  A related question concern how does monetary policy respond to productivity and human capital in the economy 3) finally, is the limited role of monetary policy due to the interdependence of this policy and human capital development? The evidence in respect to these questions is that, although productivity responded to both macro-economic variables around the same period, we noticed that productivity response more to human capital than its response to money supply in the model. Again, with respect to changes in money supply, it is expected that productivity would improve quickly in response to a sluggish monetary policy but reverse is the case. Economic performance in South Africa has not led to the expansion of human capital in the country. From the variance decomposition result, it was noted in response to question 3 that human capital development and its interaction with monetary policy are not doing enough to spur expansion in the economic activity in the country. Policy makers should know that given that human capital growth is crucial in a given economy, the lack of effect of monetary policy on human capital suggests that limited productivity has been a result of limited investment in human capital.


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