This paper assesses the impact of monetary policy on real house price growth in South Africa using a factor-augmented vector autoregression (FAVAR), estimated using a large data set comprising of 246 quarterly series over the period 1980:01 to 2006:04. The results based on the impulse response functions indicate that, in general, house price inflation responds negatively to monetary policy shock, but the responses are heterogeneous across the middle-, luxury-and affordable-segments of the housing market. The luxury-, large-middle-and medium-middlesegments are found to respond much more than the small-middle-and the affordable-segments of the housing market. More importantly, we find no evidence of the home price puzzle, observed previously by other studies that analyzed house prices using small-scale models. We put this down to the benefit gained from using a large information set.
This paper examines the relationship between in ‡ation and in ‡ation expectations of analysts, business, and trade unions in South Africa during the in ‡ation targeting (IT) regime. We consider in ‡ation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate in ‡ation expectations of individual agents as the weighted average of lagged in ‡ation and the in ‡ation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the of…cial target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged in ‡ation and the opposite is true for analysts. The results reveal that the SARB has succesfully anchored expectations of analysts but that price setters have not su¢ ciently used the focal point implicit in the in ‡ation targeting regime. The implication is that the SARB may be pushed to accommodate private agents'expectations.JEL Classi…cation Numbers: C51, E52, E58.
This paper uses large Factor Models (FMs), which accommodate a large cross-section of macroeconomic time series for forecasting the per capita growth rate, inflation, and the nominal short-term interest rate for the South African economy. The FMs used in this study contain 267 quarterly series observed over the period 1980Q1-2006Q4. The results, based on the RMSEs of one-to four-quarter-ahead out-of-sample forecasts from 2001Q1 to 2006Q4, indicate that the FMs tend to outperform alternative models such as an unrestricted VAR, Bayesian VARs (BVARs) and a typical New Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) model in forecasting the three variables under consideration, hence indicating the blessings of dimensionality.
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