Determinants of Financial Stability and Development in South Africa: Insights from a Quantile ARDL Model of the South African Financial Cycle

This study aims to investigate the short-run and long-run dynamics of the financial cycle in South Africa by identifying its key macroeconomic drivers and understanding their asymmetric effects across different phases of the cycle. The research addresses the persistent challenge in emerging market economies of achieving both financial development and stability amid volatile macroeconomic conditions. Using monthly data from 2002 to 2024, the study employs a Quantile Autoregressive Distributed Lag (QARDL) model to capture both the heterogeneity and persistence of macro-financial linkages across the distribution of the financial cycle. The findings indicate that the drivers of financial development in South Africa appear to be monetary policy and the housing sector, which have shown positive long-term effects. On the other hand, variables such as exchange rate movements, inflation, money supply, and macroprudential policy act as constraints on financial development. In terms of triggers of short-term financial booms and bursts, the evidence points to GDP growth, credit, share prices, and to some extent housing prices, as sources of temporary upswings in financial activity. Conversely, money supply and inflation are more closely associated with burst phases and financial volatility. These findings stress the importance of policy coordination—particularly between monetary and macro-prudential authorities—to strike a balance between promoting financial development and ensuring financial stability in emerging markets. This study contributes to the empirical literature on financial cycles in developing economies and offers practical insights for policymakers tasked with navigating complex financial environments.