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

  • 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)

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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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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