Macroprudential policy and house prices in an estimated Dynamic Stochastic General Equilibrium model for South Africa

Abstract

AbstractThis article examines the interaction of housing‐related macroprudential policies and monetary policy. The study uses housing cycles in a Dynamic Stochastic General Equilibrium (DSGE) model with a small open‐economy framework. We estimate the model with Bayesian techniques using South African data covering the period from 2000Q1 to 2018Q4. The results indicate that monetary policy has small effects on house prices. We consider a loan‐to‐value (LTV) tool for macroprudential policy. The results show that a 1% rise in the LTV ratio, a tight macroprudential policy, leads to increasing house prices, with significant effects on Consumer Price Index (CPI) inflation. The effects on CPI inflation suggest that monetary policy is not very effective. Efficient policy frontier analysis indicates that the introduction of macroprudential policy yields an improved effective outcome that lowers output and inflation volatility. The findings suggest monetary policy and macroprudential policy require coordination.