Stock price dynamics and the business cycle in an estimated DSGE model for South Africa

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Authors

Paetz, Michael
Gupta, Rangan

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Publisher

Elsevier

Abstract

This paper develops and estimates an open economy dynamic stochastic general equilibrium model of South Africa. We devote special attention to the impact of stock price wealth effects on output and the interest rate. For this reason we adopt a perpetual youth approach, which allows for a limited decision horizon. We estimate the model using Bayesian techniques and find that (i) about 9 percent of the volatility in production can be explained by financial shocks, and (ii) the SARB does not and should not react on stock price disturbances. Moreover, stock prices seem to be unaffected by shocks from the real economy.

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Keywords

Wealth effects, Open economy, South Africa (SA), Dynamic stochastic general equilibrium (DSGE) model

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Citation

Paetz, M & Gupta, R 2016, 'Stock price dynamics and the business cycle in an estimated DSGE model for South Africa', Journal of International Financial Markets, Institutions and Money, vol. 44, pp.166-182.