House Prices and Balance of Trade Dynamics in South Africa: Evidence from an Agnostic Identification Procedure

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.