Abstract:
In this paper, we analyze the relationship between house prices and the trade balance in
South Africa using an agnostic identification procedure. We apply a Bayesian vector
autoregression (VAR) to quarterly data from 1979:Q1 to 2011:Q4 and find that 1% decline
in house prices can improve the trade balance by 0.2%. This suggests that house prices
represent an additional instrument for trade balance adjustment besides the traditional
exchange rate channel. Moreover, the effect of housing demand shock on the exchange
rate is short-lived and insignificant; hence, house prices affect the trade balance mainly
through the wealth and balance sheet effects on consumption and investment,
respectively.
