Do stock prices impact consumption and interest rate in South Africa? Evidence from a time-varying vector autoregressive model

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Authors

Aye, Goodness Chioma
Gupta, Rangan
Modise, Mampho P.

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Publisher

Sage

Abstract

This paper investigates the existence of spillovers from stock prices onto consumption and the interest rate for South Africa using a time-varying vector autoregressive (TVP-VAR) model with stochastic volatility. In this regard, we estimate a three-variable TVP-VAR model comprising of real consumption growth rate, the nominal three-months Treasury bill rate and the growth rate of real stock prices. We find that the impact of a real stock price shocks on consumption is in general positive, with large and significant effects observed at the one-quarter ahead horizon. However, there is also evidence of significant negative spillovers from the stock market to consumption during the financial crisis, at both short and long-horizons. Monetary policy response to stock price shocks has been persistent, and strong especially post-the financial liberalization in 1985, but became weaker during the financial crisis. Overall, we provide evidence of significant time-varying spillovers on consumption and interest rate from the stock market.

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Keywords

Bayesian inference, Consumption, Stock price, Markov chain Monte Carlo (MCMC), Monetary policy, Structural vector autoregression, Stochastic volatility, Time-varying parameter (TVP), Time-varying parameter vector autoregressive (TVP-VAR)

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Citation

Aye, GC, Gupta, R & Modise, MP 2015, 'Do stock prices impact consumption and interest rate in South Africa? Evidence from a time-varying vector autoregressive model', Journal of Emerging Market Finance, vol. 14, no. 2, pp. 176-196.