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Wealth, Credit Conditions, and Consumption: Evidence from South Africa

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The role of housing wealth in explaining consumption remains controversial. This paper emphasizes credit liberalization and wealth in explaining consumption behavior in South Africa, 1971 to 2005. Results support a collateral interpretation of housing wealth affecting consumption as against a life‐cycle interpretation. Liquid and illiquid wealth time series data previously constructed by the authors from household balance sheets are used. Credit conditions are proxied by a spline function entering jointly estimated consumption, debt and income expectations equations in a “latent interactive variable equation system” (LIVES). Empirical results corroborate the theory in the paper: consumption relative to income is driven by credit liberalization and its interactions with other drivers of consumption and debt, by uncertainty, income expectations, and by fluctuations in a range of asset values and in asset accumulation. The results illuminate the monetary policy transmission mechanism in South Africa.
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Keywords: C52; E21; E27; E32; E44; E51; E52; E58; consumption; credit conditions; credit market liberalization; household debt; housing collateral; housing wealth; liquid and illiquid wealth

Document Type: Research Article

Publication date: 01 October 2013

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