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Does household net financial wealth explain the asymmetric reaction of household consumption to monetary policy shocks in South Africa?

Ndou et al (2019) showed that, in absolute terms, the decline in household consumption due to the monetary policy tightening shocks exceeds the increase in household consumption, following the monetary policy loosening shocks of the same magnitude. This paper applies a counterfactual vector autoregression (VAR) approach to determine whether the household net financial wealth explains the asymmetric reaction of household consumption to monetary policy shocks in South Africa. I find that the percentage of fluctuations in the consumption changes attributed to the wealth changes is much bigger to the monetary policy tightening shocks compared to the loosening shocks. In addition, I find that the household net financial wealth channel propagates the changes in the household consumption more to the monetary policy tightening shocks than to the monetary policy loosening shocks. I reach the same conclusion using household net worth. This finding of asymmetric household consumption reaction implies that the monetary policy tightening stance will slow down economic growth more than the loosening shock can stimulate it.

Working paper 834
1 September 2020
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