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Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model

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Author Info

  • Goodness C. Aye

    ()
    (Department of Economics, University of Pretoria, South Africa)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Mampho P. Modise

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper investigates the existence of spillovers from stock prices onto consumption and the interest rate for South Africa using a time-varying vector autoregressive (TVP-VAR) model with stochastic volatility. In this regard, we estimate a three-variable TVP-VAR model comprising of real consumption growth rate, the nominal three-months Treasury bill rate and the growth rate of real stock prices. We find that the impact of a real stock price shocks on consumption is in general positive, with large and significant effects observed at the one-quarter ahead horizon. However, there is also evidence of significant negative spillovers from the stock market to consumption during the financial crisis, at both short and long-horizons. Monetary policy response to stock price shocks has been persistent, and strong especially post-the financial liberalization in 1985, but became weaker during the financial crisis. Overall, we provide evidence of significant time-varying spillovers on consumption and interest rate from the stock market.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201224.

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Length: 14 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:pre:wpaper:201224

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Keywords: Bayesian Inference; Consumption; Stock Price; Markov Chain Monte Carlo; Monetary Policy; Structural Vector Autoregression; Stochastic Volatility; Time-Varying Paremeter;

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References

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Citations

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Cited by:
  1. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel A. Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working Papers 201228, University of Pretoria, Department of Economics.
  2. Rangan Gupta & Charl Jooste & Kanyane Matlou, 2013. "A Time-Varying Approach to Analysing Fiscal Policy and Asset Prices in South Africa," Working Papers 201303, University of Pretoria, Department of Economics.
  3. Gupta, Rangan & Modise, Mampho P., 2013. "Does the source of oil price shocks matter for South African stock returns? A structural VAR approach," Energy Economics, Elsevier, vol. 40(C), pages 825-831.
  4. Chance Mwabutwa & Manoel Bittencourt & Nicola Viegi, 2013. "Evolution of Monetary Policy Transmission Mechanism in Malawi: A TVP-VAR Approach," Working Papers 201327, University of Pretoria, Department of Economics.
  5. Alexander Zimper, 2013. "The minimal confidence levels of Basel capital regulation," Working Papers 201305, University of Pretoria, Department of Economics.
  6. Goodness C. Aye & Rangan Gupta & Alain Kaninda & Wendy Nyakabawo & Aarifah Razak, 2013. "House Price, Stock Price and Consumption in South Africa: A Structural VAR Approach," Working Papers 201309, University of Pretoria, Department of Economics.

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