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

Goodness Aye (), Rangan Gupta and Mampho Modise ()
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Goodness Aye: Department of Economics, University of Pretoria, South Africa
Mampho Modise: Department of Economics, University of Pretoria

No 201224, Working Papers from University of Pretoria, Department of Economics

Abstract: 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.

Keywords: Bayesian Inference; Consumption; Stock Price; Markov Chain Monte Carlo; Monetary Policy; Structural Vector Autoregression; Stochastic Volatility; Time-Varying Paremeter (search for similar items in EconPapers)
JEL-codes: C11 C15 C32 E31 E32 E44 E52 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2012-08
New Economics Papers: this item is included in nep-afr
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Citations: View citations in EconPapers (23)

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Journal Article: Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-varying Vector Autoregressive Model (2015)
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