Housing market spillovers in South Africa: evidence from an estimated small open economy DSGE model

Abstract

This paper evaluates the impact of housing market spillovers on a small open economy, namely South Africa, using a small-open economy new Keynesian dynamic stochastic general equilibrium model (SOE-NKDSGE) which explicitly incorporates a housing sector. Using quarterly data covering the period of 1971:Q1-2015:Q3, we obtain the following set of results: (a) Over the business cycle, the housing preference shock and the technology shock in the consumption sector drive most of the fluctuations of real house price; (b) The spillover effects of the housing market to the boarder economy are not negligible; (c) The central bank of South Africa has actively responded to house price movements over the past 45 years; and (d) The flexible exchange rate policy has helped South Africa maintain the macroeconomic stability to a large extent.

The Optimal Monetary and Macroprudential Policies for the South African Economy

“…The habit persistence parameter is estimated at 0.54 and the impatient households’ labour income share parameter at 0.22. These values are fairly in line with the estimated values in Iacoviello (2015) and Gupta and Sun (2018). The Calvo parameter, which measures the degree of price stickiness, is estimated at 0.47.…”

“…The parameter for the impatient household's labour income share is assumed to follow a beta distribution with a mean of 0.3 and a standard deviation of 0.02. These priors are based on Iacoviello (2015) and Gupta and Sun (2018). The priors for the parameters of the monetary policy rule are set as follows.…”

“…The persistence of all structural shocks is assumed to follow a beta distribution with a mean of 0.8 and a standard deviation of 0.1 in line with the literature ( e.g . Steinbach et al ., 2009; Alpanda et al ., 2010; Gupta and Sun, 2018). The standard deviation of the shocks is assumed to follow an inverse gamma distribution with a mean of 0.1 and standard deviation of 0.25.…”

The Impact of Oil Shocks in a Small Open Economy New-Keynesian Dynamic Stochastic General Equilibrium Model for an Oil-Importing Country: The Case of South Africa

“…All these studies rely on macroeconometric models comprising of either (linear or nonlinear) regressions and variations of vector autoregressive (VAR) or vector error-correction (VEC) frameworks. These types of models involve only a few variables and therefore tend to be misspecified (Paetz and Gupta, forthcoming), and hence, the results from these studies could be biased and probably differ from the true magnitude of the effects of oil price shocks (Gupta and Sun, 2016).…”

“…Using a theoretical framework helps identify channels through which oil price affects the economy, quantify its importance, and also provide recommendations for policy-makers, especially central bankers. In addition, recent studies by Paetz and Gupta (forthcoming) and Gupta and Sun (2016), while analysing the impact of stock and house prices on the South African economy, show that results based on atheoretical frameworks tend to be way overstated than those obtained under microfounded dynamic stochastic general equilibrium (DSGE) models.…”