IDEAS home Printed from https://ideas.repec.org/p/adb/adbwps/317.html
   My bibliography  Save this paper

Working Paper 133 - Monetary Policy Transmission, House Prices and Consumer Spending in South Africa: An SVAR Approach

Author

Listed:
  • Mthuli Ncube

    ()

  • Eliphas Ndou

Abstract

The study used a structural vector autoregressive approach to estimate and quantify the percentage decline in consumption expenditure, which can be attributed to changes in housing wealth, after monetary policy tightening. The effects are separated using a disaggregated Absa house price data, namely all-size, large-size and medium-size and small-size house prices.The results suggest that at the peak of the interest rate effects on consumption the combined effect of housing wealth and credit extension changes, following a monetary policy tightening, was a decline of 9.8 per cent in all-size, 3.7 per cent in small-size, 4.7 per cent in medium-size and 5.3 per cent in large-size houses. The findings indicate heterogeneity in the transmission of interest rate effects operating through housing wealth and the credit channel. Moreover, we reached the same conclusion after modifying the baseline model by adding the restrictions that house price also respond to both aggregate demand and aggregate supply variables. Lastly, the differences between the counterfactual consumption and the baseline consumption responses, provided little support for the assumption that the housing wealth channel is the dominant source of monetary policy transmission to consumption.This paper thus provided an understanding of the indirect channels through which monetary policy influences real variables by focusing on monetary policy transmission to consumption via house prices. We showed interest rate effects, working through both housing wealth and the credit channel, influence real spending. Thus, interest rate effects operating through housing wealth and the credit channel are felt differently by the four house categories. Moreover, the differences between the consumption impulse responses from the counterfactual and baseline scenarios provide little support that combined house wealth and credit effect channels are the dominant sources of monetary policy transmission to consumption. These findings suggest that the direct effects of high interest rates on consumption appear to be more important in transmitting monetary policy to the economy than through the indirect effects. Hence, monetary policy tightening can only marginally weaken inflationary pressures arising from excessive consumption operating through housing wealth and the credit channel.

Suggested Citation

  • Mthuli Ncube & Eliphas Ndou, 2011. "Working Paper 133 - Monetary Policy Transmission, House Prices and Consumer Spending in South Africa: An SVAR Approach," Working Paper Series 317, African Development Bank.
  • Handle: RePEc:adb:adbwps:317
    as

    Download full text from publisher

    File URL: https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/WORKING%20133%20Monetary%20Policy%20Transmission%20.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Calza, Alessandro & Monacelli, Tommaso & Stracca, Livio, 2006. "Mortgage markets, collateral constraints, and monetary policy: Do institutional factors matter?," CFS Working Paper Series 2007/10, Center for Financial Studies (CFS).
    2. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    3. Christopher J. Mayer, 2002. "Monetary policy transmission to residential investment : commentary," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 159-161.
    4. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    5. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
    6. Jonathan McCarthy & Richard Peach, 2002. "Monetary policy transmission to residential investment," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 139-158.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Aye, Goodness C. & Balcilar, Mehmet & Bosch, Adél & Gupta, Rangan, 2014. "Housing and the business cycle in South Africa," Journal of Policy Modeling, Elsevier, vol. 36(3), pages 471-491.
    2. McKenzie, Rex A, 2015. "Monetary transmission in Africa: a review of official sources," Economics Discussion Papers 2015-7, School of Economics, Kingston University London.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:adb:adbwps:317. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Adeleke Oluwole Salami). General contact details of provider: http://edirc.repec.org/data/afdbgci.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.