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House Prices And Balance Of Trade Dynamics In South Africa: Evidence From An Agnostic Identification Procedure

Author

Listed:
  • Beatrice D. Simo-Kengne

    () (Department of Economics, University of Pretoria)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Goodness C. Aye

    () (Department of Economics, University of Pretoria)

Abstract

This paper analyses the relationship between house prices and the trade balance in South Africa using an agnostic identification procedure. This method allows a housing demand shock to be identified in an eight-variable VAR model by imposing sign restrictions on the impulse responses of consumer prices, private consumption, residential investment, nominal interest rate, real house prices and mortgage loan, while trade balance and real effective exchange rate responses are left unrestricted. We apply a Bayesian Vector Autoregressive (BVAR) model to quarterly data from 1979:Q1 to 2011:Q4 and report a sizable effect of house price shocks on trade balance. The results indicate that a 1 percent decline in house prices can improve the trade balance by 0.2 percent. This suggests that house prices represent an additional instrument for trade-balance adjustment besides the traditional exchange rate channel. However, the effect of housing demand shock on the exchange rate is short-lived and insignificant. Therefore, house prices affect the South African trade balance mainly through the wealth and balance sheet effects on private consumption and investment, respectively. Further, we find that the contribution of house price shocks to the historical path of the trade balance is less prominent in 2000s; possibly substantiating the effectiveness in the conduct of South African monetary policy, which has been shown to be incorporating house price movements in its interest rate setting behaviour.

Suggested Citation

  • Beatrice D. Simo-Kengne & Rangan Gupta & Goodness C. Aye, 2012. "House Prices And Balance Of Trade Dynamics In South Africa: Evidence From An Agnostic Identification Procedure," Working Papers 201227, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201227
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    Keywords

    House prices; wealth effect; financial markets; balance of trade; Bayesian VAR;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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