Exchange Rate, House Price and Equity Shocks on the Current Account

Mthuli Ncube () and Eliphas Ndou

Chapter 8 in Monetary Policy and the Economy in South Africa, 2013, pp 139-156 from Palgrave Macmillan

Abstract: Abstract The drivers of trade balance in South Africa were analysed in Chapter 7 and evidence suggests both exchange rate and monetary policy shocks affect the trade balance through imports, rather than exports. The trade balance is a component of the current account. The South African current account balance has remained negative since 2003-Q2. This current account deterioration in the period 2003–10 has been more persistent compared with similar deteriorations in the period 1994–99. In addition, the deteriorations between 2003 and 2010 coincided with a massive appreciation in stock and house prices between 2004 and 2008. This is supported by trends in asset price movements in relation to the current account, as shown in Figure 8.1. Studies on international transmission have found strong linkages between asset prices across countries. In addition, Chapter 6 found that developments in US mortgage debt were positively transmitted to South African mortgage debt and that house prices were positively correlated.1 Moreover, Chapter 4 showed that house price appreciation leads to currency appreciation in South Africa, irrespective of the housing sector.

Keywords: Exchange Rate; Monetary Policy; Current Account; Current Account Balance; Real Effective Exchange Rate (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-33415-2_8

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DOI: 10.1057/9781137334152_8

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