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

  • Vittorio Peretti

    ()

    (Department of Economics, University of Pretoria)

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Roula Inglesi-Lotz

    ()

    (Department of Economics, University of Pretoria)

This paper investigates the existence of spillovers from the housing sector 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 house prices. The results suggest that, in general, consumption responded positively to a house price shock over the entire sample, with the effect being stronger post financial liberalization. On the other hand, a positive delayed response of nominal interest rate followed a house price shock, with the effect being weaker post financial liberalization until the South African Reserve Bank (SARB) moved to the official inflation-targeting regime. The effect of house prices on both consumption and interest rate was understandably weak during the financial crisis.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201216.

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Length: 18 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:pre:wpaper:201216
Contact details of provider: Postal: PRETORIA, 0002
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Web page: http://www.up.ac.za/economics

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