1) The document examines the interdependence between South Africa's business cycle and those of its major trading partners - Germany, Japan, the US, and the UK. 2) Using structural vector autoregressive models and monthly data from 1980 to 2008 on industrial production, prices, interest rates, and exchange rates, the study finds that South Africa benefits from economic growth in both the UK and US. 3) The results also show significant price transmission from Germany and Japan to South Africa, though not vice versa, and that a positive shock to German or Japanese producer prices negatively impacts South African industrial production growth.

1. INTERDEPENDENCE AND BUSINESS CYCLE TRANSMISSION BETWEEN SOUTH
AFRICA AND THE USA, UK, JAPAN AND GERMANY
Terrence Tafadzwa Mugova
Student number: 603m2595
Thesis submitted in partial fulfilment of the requirements for the degree of
MASTERS OF COMMERCE (FINANCIAL MARKETS)
Department of Economics and Economic History
Rhodes University, Grahamstown
Supervisor: Dr. Meshach Aziakpono
Date of submission of thesis: 20 January 2009

2. ABSTRACT
The process of globalisation has had a large impact on the world economy over the past three
decades. Economic globalisation has manifested itself in the increasing integration of goods and
services through international trade and the integration of financial markets. As a consequence
the existence of co-movements in economic variables of different countries has become more
evident. The extent to which globalisation causes a country’s economy to move together with the
rest of the world concerns policy-makers. When such co-movement is significant, the influence
of policy-makers on their respective domestic economies is significantly reduced. South Africa
re-entered the international economy in the early 1990s when the forces of globalisation,
especially for developing countries, seemed to gain momentum. Empirical research such as
Kabundi and Loots (2005) found strong evidence of international co-movement between the
world business cycle and the South African business cycle, particularly following South Africa’s
integration into the global economy.
This study examines the relationship and interdependence between South Africa and four of its
major developed trading partners. More particularly, the study examines the question of whether
business cycles are transmitted from Germany, Japan, US and UK to South Africa, and/or from
South Africa to Germany, Japan, the US and UK. The study employs structural vector
autoregressive (SVARs) models to analyse monthly data from 1980:01–2008:04 on industrial
production, producer prices, short-term interest rates and real effective exchange rates. The
results show that South Africa benefits from economic growth in both the UK and US. They also
indicate significant price transmission from Germany and Japan to South Africa, with
transmission in the opposite direction being statistically insignificant. The impulse response
graphs show that a positive one standard deviation shock to both German and Japanese producer
prices has a negative impact on South African output (industrial production) growth.
Furthermore, South African monetary policy is relatively unresponsive to international monetary
policy stances. The findings of this study indicate that South African policymakers need to take
into consideration economic performance of the country’s major trading partners, with particular
emphasis on the UK and US economies.