The lean versus clean debate and monetary policy in South Africa



Abstract. This paper contributes to the lean versus clean debate by examining whether or not monetary policy in South Africa leans against the wind or cleans up after the bubble has bust. This is achieved by analysing the behaviour of asset prices during the different phases of monetary policy stance. The models that allow the behaviour of the asset prices to differ during periods of tight and easy monetary conditions as well as during periods of contractionary and expansionary monetary conditions are specified. The results provide evidence of an asymmetric behaviour between monetary policy interest rate and asset prices during the periods of easy and tight monetary conditions. The empirical results further provide evidence of symmetric behaviour between themonetary policy interest rate and asset prices during the periods of contractionary and expansionary monetary conditions. Thus monetary policy in South Africa supports the proposition of leaning against the wind as opposed to the proposition of cleaning up after the bubble has burst.

Keywords. Lean versus clean debate, Monetary policy regimes, Financial distress.

JEL. C51, E52, E61, G01.

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