Is the relationship between monetary policy and house prices asymmetric in South Africa? Evidence from a Markov-Switching Vector Autoregressive mode

Stellenbosch Working Paper Series No. WP14/2012
 
Publication date: 2012
 
Author(s):
[protected email address] (Department of Economics, University of Pretoria)
[protected email address] (Department of Economics, Eastern Mediterranean University)
[protected email address] (Department of Economics, University of Pretoria)
[protected email address] (Department of Economics, University of Stellenbosch)
[protected email address] (Department of Economics, University of Pretoria)
 
Abstract:

This paper examines asymmetries in the impact of monetary policy on the middle segment of the South African housing market from 1966:M2 to 2011:M12. We use Markov-switching vector autoregressive (MS-VAR) in which parameters change according to the phase of the housing cycle. The results suggest that monetary policy is not neutral as house price growth decreases substantially with a contractionary monetary policy. We find that the impact of monetary policy is larger in bear regime than in bull regime; indicating the role of information asymmetry in reinforcing the financial constraint of economic agents. As expected, monetary policy reaction to a positive house price shock is found to be stronger in the bull regime. This suggests that central banker reacts more in bull regime in order to prevent potential crisis related to the subsequent bust in house prices bubbles which are more prominent in bull markets. These results substantiate important asymmetries in the dynamics of house prices in relation to monetary policy, vindicating the advantages of generating regime dependent impulse response functions.

 
JEL Classification:

C22, C32, E52, R31

Keywords:

Monetary policy, House prices, Regime switching

Download: PDF (599 KB)

Login

(for staff & registered students)



Need a password?
Forgot your password?

Upcoming Seminars

No seminars are currently listed. Please check back soon.
 
More...

BER Weekly

11 November 2019
Notwithstanding the apparent optimism surrounding President Cyril Ramaphosa's second Investment Conference last week, economic data released for Q3 disappointed. The consumer turned notably more pessimistic during the quarter, while the latest activity data from the country's secondary sector also paints a dismal picture for GDP. On the global front,...

Read the full issue
 

Upcoming Seminars

No seminars are currently listed. Please check back soon.
 
More...

BER Weekly

11 November 2019
Notwithstanding the apparent optimism surrounding President Cyril Ramaphosa's second Investment Conference last week, economic data released for Q3 disappointed. The consumer turned notably more pessimistic during the quarter, while the latest activity data from the country's secondary sector also paints a dismal picture for GDP. On the global front,...

Read the full issue