HOUSE PRICES AND BALANCE OF TRADE DYNAMICS IN SOUTH AFRICA: EVIDENCE FROM AN AGNOSTIC IDENTIFICATION PROCEDURE

Beatrice Desiree Simo-Kengne (), Rangan Gupta and Goodness Aye ()
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Goodness Aye: Department of Economics, University of Pretoria

No 201227, Working Papers from University of Pretoria, Department of Economics

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.

Keywords: House prices; wealth effect; financial markets; balance of trade; Bayesian VAR (search for similar items in EconPapers)
JEL-codes: C32 E31 E44 F32 R21 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2012-08
New Economics Papers: this item is included in nep-afr and nep-ure
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Journal Article: House Prices and Balance of Trade Dynamics in South Africa: Evidence from an Agnostic Identification Procedure (2015)
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