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Is the relationship between monetary policy and house prices asymmetric in South Africa? Evidence from a Markov-Switching Vector Autoregressive mode

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Author Info

  • Beatrice D. Simo - Kengne

    ()
    (Department of Economics, University of Pretoria)

  • Mehmet Balcilar

    ()
    (Department of Economics, Eastern Mediterranean University)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Monique Reid

    ()
    (Department of Economics, University of Stellenbosch)

  • Goodness C. Aye

    ()
    (Department of Economics, University of Pretoria)

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) 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 central banker 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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File URL: http://www.ekon.sun.ac.za/wpapers/2012/wp142012/wp-14-2012.pdf
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Bibliographic Info

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 14/2012.

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Date of creation: 2012
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Handle: RePEc:sza:wpaper:wpapers166

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Keywords: Monetary policy; House prices; Regime switching;

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References

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Cited by:
  1. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel Abidin Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working papers 2012-27, University of Connecticut, Department of Economics.
  2. Beatrice D. Simo-Kengne & Rangan Gupta & Goodness C. Aye, 2013. "Macro Shocks And House Prices In South Africa," Working Papers 201302, University of Pretoria, Department of Economics.

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