The Effect of Monetary Policy on Real House Price Growth in South Africa： A Factor Augmented Vector Autoregression (FAVAR) Approach.docVIP

The Effect of Monetary Policy on Real House Price Growth in South Africa： A Factor Augmented Vector Autoregression (FAVAR) Approach University of Pretoria Department of Economics Working Paper Series The Effect of Monetary Policy on Real House Price Growth in South Africa: A Factor Augmented Vector Autoregression (FAVAR) Approach Rangan Gupta University of Pretoria Alain Kabundi University of Johannesburg Working Paper: 2009-05 January 2009 __________________________________________________________ Department of Economics University of Pretoria 0002, Pretoria South Africa Tel: +27 12 420 2413 Fax: +27 12 362 5207 THE EFFECT OF MONETARY POLICY ON REAL HOUSE PRICE GROWTH IN SOUTH AFRICA: A FACTOR AUGMENTED VECTOR AUTOREGRESSON I(FAVAR) APPROACH ??#Rangan Gupta and Alain Kabundi Asbtract This paper assesses the impact of monetary policy on real house price growth in South Africa using a factor-augmented vector autoregression (FAVAR), estimated based on a large data set comprising of 246 uqarterly 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-middle-segments 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 . Keywords: oMnetary Policy ;Real House Price Growth ;FAVAR. JEL Classification Codes: 3C2 ;E52 ;R2 . ?? Associate Professor, Department of Economics, University of Pretoria, Pretoria, 0002, South