Income inequality, household debt, current account imbalances and the risks of secular stagnation in South Africa

Ntshwanti, Mzwanele (2025). Income inequality, household debt, current account imbalances and the risks of secular stagnation in South Africa. University of Birmingham. Ph.D.

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Abstract

This thesis has three main chapters. Chapter 1 is an introductory chapter, and Chapter 5 provides a general conclusion and policy recommendations. The studies are in quarterly frequencies, from 1980Q1 to 2022Q4 for chapters 3 and 4, and from 1993Q1 to 2022Q4 for chapter 2 owing to data availability. Data were collected from the South African Reserve Bank (SARB), the World Inequality Database (WID), the Organization for Economic Cooperation and Development (OECD), the World Bank and the International Monetary Fund (IMF).
In Chapter 2, we first estimate a structural VAR (SVAR) model with the Gini index, GDP per capita growth, inflation rate, and nominal interest rates to examine the impact of inequality on GDP per capita growth and monetary policy variables. Second, we construct a heterogeneous agents New Keynesian (NK) Dynamic Stochastic General Equilibrium (DSGE) framework with a rich and a non-rich household to model the impact of inequality on the level of output and real interest rates in South Africa. In this chapter, the two models are used for robustness since the SVAR models are appropriate for capturing short-run dynamics without requiring strict theoretical restrictions, while DSGE models are suited to capture long-run dynamics and policy impacts (since the Gini index is a long-term structural variable).
In the DSGE model, we simulate the effect of an increase in income inequality on real interest rates and the output level in South Africa by introducing a shock to the production elasticity of the non-rich household and a shock to the firm’s markup. The overall results show that an increase in income inequality leads to a decrease in the output level (in the case of the DSGE model), the GDP per capita growth rate (in the case of the SVAR model), and interest rates (on both models). The SVAR results are robust to alternative income inequality measurements such as the Top 10% and Bottom 40% of income earners and the wage share.
Chapter 3 examines the impact of household debt to disposable income and its dynamics on the GDP per capita growth rate and real interest rates in South Africa. We include a set of exogenous variables that may affect household demand for debt, namely the unemployment rate, debt servicing costs, and the inflation rate. We find that a shock to the household debt to disposable income is significant and leads to a positive response in the GDP per capita growth rate and real interest rates when assessing the full sample period (1980Q1-2022Q4) and before the global financial crisis sample periods (1980Q1-2007Q4). However, we find a negative and significant response in the GDP per capita growth rate and real interest rates when assessing the post-crisis period (2009Q1-2022Q4). These findings indicate the instability of a debt-financed growth regime and are consistent with demand and supply side explanations for the effects of debt on the GDP per capita growth rate and interest rates in the context of secular stagnation.
Chapter 4 uses a SVAR technique to investigate the impact of current account imbalances and their dynamics on the GDP per capita growth rate and real interest rates in South Africa. We include government expenditure-to-GDP ratio, saving-to-GDP ratio, and oil price as exogenous variables. We find that a shock to the current account-to-GDP ratio is significant and leads to a decline in the GDP per capita growth rate and real interest rates. These findings are consistent with demand-side explanations to secular stagnation, signaling chronic external demand effects in South Africa.
Results from all three chapters provide support for demand-led secular stagnation characteristics in South Africa. At the end, we provide some policy recommendations that can be implemented to escape secular stagnation trends and resolve structural income inequality, chronic external demand, and high household debt.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):