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Is the relationship between monetary policy and house prices asymmetric across bull and bear markets in South Africa? Evidence from a Markov-switching vector autoregressive model

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  • Simo-Kengne, Beatrice D.
  • Balcilar, Mehmet
  • Gupta, Rangan
  • Reid, Monique
  • Aye, Goodness C.

Abstract

This paper examines asymmetries in the impact of monetary policy on the middle segment of the South African housing market from 1966:M2 to 2011:M12. We use Markov-switching vector autoregressive (MS-VAR) model in which parameters change according to the phase of the housing cycle. The results suggest that monetary policy is not neutral as house price growth decreases substantially with a contractionary monetary policy. We find that the impact of monetary policy is larger in bear regime than in bull regime; indicating the role of information asymmetry in reinforcing the financial constraint of economic agents. As expected, monetary policy reaction to a positive house price shock is found to be stronger in the bull regime. This suggests that the central bank reacts more in bull regime in order to prevent potential crisis related to the subsequent bust in house prices bubbles which are more prominent in bull markets. These results substantiate important asymmetries in the dynamics of house prices in relation to monetary policy, vindicating the advantages of generating regime dependent impulse response functions.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 161-171

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Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:161-171

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Monetary policy; House prices; Regime switching;

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Cited by:
  1. Yang, Lu & Hamori, Shigeyuki, 2014. "Spillover effect of US monetary policy to ASEAN stock markets: Evidence from Indonesia, Singapore, and Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 145-155.
  2. Beatrice D. Simo-Kengne & Stephen M. Miller & Rangan Gupta, 2013. "Evolution of Monetary Policy in the US: The Role of Asset Prices," Working Papers 201343, University of Pretoria, Department of Economics.

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