Earnings, Unemployment, and Housing: Evidence from a Panel of British Regions

This paper models regional earnings and unemployment in the ten regions of Great Britain between 1972 and 1995, paying particular attention to their interaction and to the important influence of the housing market. In contrast to Blanchard and Katz (1992, 1997) for the United States, we find less persistence in British regional earnings differentials but greater persistence in regional unemployment rates. We find no evidence of a negative effect of the overall unemployment rate on the earnings of men in non-manual, or women in full-time, employment and find a positive effect for women in part-time employment. However, for manual men, we find a significant elasticity of around -0.07, comparable with Blanchflower and Oswald (1994).

Housing and Personal Wealth in a Global Context

Housing is the single most important component of personal wealth in most countries. The special characteristics of housing markets are therefore key to understanding personal portfolios, saving, the household distribution of wealth, and the monetary transmission mechanism. This paper discusses how housing markets and institutions differ across countries, paying particular attention to the UK and the EU, but extending its reach as well to other OECD countries such as Japan and emerging market countries such as South Africa. It analyzes how those differences help to create contrasts in the impact on consumption of housing as a component of personal wealth. The impacts of rates of home ownership, credit market characteristics, interest rates, and macroeconomic conditions are studied. Implications for monetary, fiscal, and other policies are discussed.housing, wealth, consumption, interest rates, monetary transmission

Financial liberalisation, consumption and debt in South Africa

South Africa experienced substantial rises in the ratios of consumption and household debt to income from 1983, for which conventional explanations in terms of income, income expectations, interest rates and wealth prove inadequate. This paper emphasizes the role of substantial financial liberalization, which is of interest for two reasons. The first is to help understand South Africa’s low saving rate, an endemic problem. The second is that unlike the UK, Scandinavia, Mexico and other countries, South Africa’s financial liberalization occurred without an asset price boom, thus illuminating the direct role of financial liberalization. Previous attempts to model financial liberalization are not fully satisfactory. Our methodological innovation is to treat financial liberalization as an unobservable, proxied by a spline function, and entering both consumption and debt equations, which are jointly estimated. We also clarify the multi-faceted effects of financial liberalization on consumption. The comprehensive solved-out consumption function uses our own constructed set of personal wealth estimates at market value and income forecasts from a forecasting equation (allowing underlying macro-fundamentals to enter the model). The empirical results corroborate the theory in the paper, confirming the importance for consumer spending of extensive financial liberalization, of fluctuations in a range of asset values and asset accumulation, and of income expectations. Results suggest that households largely pierce the corporate veil. The paper also throws important light on the monetary policy transmission mechanism in South Africa.

Construction of CPIX Data for Forecasting and Modelling in South Africa

South Africa adopted inflation targeting in 2000, targeting the consumer price index (CPI) excluding mortgage interest cost (or CPIX), for .metropolitan and urban areas.. Yet there is no clear technical account of the methodology of construction of CPI and CPIX by Statistics South Africa, as published by reputable government statistical agencies in other countries. This paper has two goals. First, we aim to enhance transparency by explaining the CPI methodology (as we understand it), and to encourage publication of an official technical handbook. We also raise various technical issues concerning CPI construction. Second, we produce estimates of CPIX (.metropolitan areas.) back to 1970, on a consistent methodology, using monthly price indices, the appropriate weights, and linking correctly when rebasing. While the CPIX (.metropolitan and urban areas.) measure only became relevant to monetary policy setting and wage contracts from 2000, and is published monthly only from 1997, a far longer time series is required for the forecasting and modelling exercises of the South African Reserve Bank (SARB), National Treasury and others. Our measure differs in some years from that published by Statistics South Africa (published monthly only back to 1994).

Monetary Policy and Inflation Modeling in a more Open Economy in South Africa.

South Africa in the 1990s became globally more integrated after years of isolation. Opening the trade and capital accounts gave impetus to a monetary policy regime change to inflation targeting from 2000, after a costly transitional period of monetary mismanagement with low policy transparency. Changes in openness can, however, disrupt the inflation forecasting on which targeting monetary policies depend. This chapter demonstrates how the central bank’s own producer price inflation equation in its core model can be improved by taking account of greater openness, using both innovative time-series openness measures and a more conventional measure. The model has a greatly improved fit and stability over longer samples when also including the real exchange rate and the interest rate differential (making explicit the exchange rate channel of monetary transmission) and asymmetric food price inflation. Moreover, there is a role for the level of the output gap rather than simply a short-run effect, as in the central bank’s model. This helps mitigate the arguments in current South African debate regarding the apparent unconcern of inflation targeting policy for the level of economic activity.

Multi-sector inflation forecasting - quarterly models for South Africa.

Inflation is a far from homogeneous phenomenon, a fact often neglected in modeling consumer price inflation. Using a novel methodology grounded in theory, the ten sub-components of the consumer price index (excluding mortgage interest rates), are modeled separately and forecast, four-quartersahead. Equilibrium correction models in a rich multivariate form employ general and sectoral information, and take account of structural breaks and institutional changes. Our methods allow for longer lags than conventionally considered in VARs, but in a parsimonious manner. Sign priors are imposed on long-run effects and automatic model selection is used to select parsimonious models from more general ones. The models throw light on sectoral sources of inflation, useful to monetary policy. Data for 1979 to 2003 are used for model selection, and pseudo out of sample forecasting performance to the end of 2007 is examined. Aggregating the weighted sub-component forecasts indicates gains are made over forecasting the overall index using these methods, and also substantial gains over forecasting using benchmark naïve models. To extend this work, including sectoral information such as an explicit treatment of tax policy, regulatory information and announced administered price rises, should further enhance these forecasting methods.

Housing Wealth, Credit Conditions and Consumption

There is widespread disagreement about the role of housing wealth in explaining consumption. Much of the empirical literature is marred by poor controls for the common drivers both of house prices and consumption, including income, income growth expectations, interest rates, credit supply conditions, other assets and indicators of income uncertainty (such as changes in the unemployment rate). For instance, while the easing of credit supply conditions is usually followed by a house price boom, failure to control for the direct effect of credit liberalization on consumption can over-estimate the effect of housing wealth or collateral on consumption. This paper suggests an empirical model grounded in theory with more complete controls than hitherto used. It is applied to modeling consumption in the UK and South Africa. Both countries experienced substantial credit market liberalization and rising consumption to income ratios. However, South Africa.s circumstances in the 1980s prevented an asset price boom, thus allowing the illumination of the direct role of credit liberalization. The paper incorporates methodological improvements in the measurement of credit conditions, and also clarifies the multi-faceted effects of credit liberalization on consumption.

Some Issues in Modeling and Forecasting Inflation in South Africa.

Inflation targeting central banks will be hampered without good models to assist them to be forward-looking. Many current inflation models fail to forecast turning points adequately, because they miss key underlying long-run influences. The world is on the cusp of a dramatic turning point in inflation. If inflation falls rapidly, such models can underestimate the speed at which interest rates should fall, damaging growth. Our forecasting models for the new measure of producer price inflation suggest methodological lessons, and build in conflicting pressures on SA inflation from exchange rate depreciation, terms of trade shocks, collapsing oil, food and other commodity prices, and other shocks. Our US and SA forecasting models for consumer price inflation underline the methodological points, and suggest the usefulness of thinking about sectoral trends. Finally, we apply the sectoral approach to understanding the monetary policy implications of introducing a new CPI measure in SA that uses imputed rents rather than interest rates to capture housing costs.

Revised Estimates of Personal Sector Wealth for South Africa

In common with many emerging market countries, South Africa’s government does not publish balance sheet wealth estimates on a market value basis, as produced in the U.S., U.K., Japan, and elsewhere. Yet without information on the market values of liquid and illiquid personal sector wealth, it is difficult to explain aggregate consumer spending and saving, consumers’ demand for credit, and the broad money holdings of households. Behavioural equations for these variables are key components of central banks’ macro-econometric models, used in forecasting and policy-making.Understanding the domestic asset value channel of the monetary policy transmission mechanism is especially important for inflation targeting countries. We construct the first coherent set of aggregate, personal sector wealth estimates at market value for South Africa. Our quarterly estimates derive from published data on financial flows, and various other capital market data, often at book value. Our methods rely, where relevant, on accumulating flow of funds data using appropriate benchmarks, and, where necessary, converting book to market values using appropriate asset price indices. Relating asset to income ratios for various asset classes to asset price movements and rates of return, throws light on the changing composition of personal sector wealth. Most striking are the rise in pension wealth- overtaking gross housing asseta in the late 1980s; the rise in household debt; and the relative decline of liquid and housing assets, from the early and mid-1980s, respectively.

Revised estimates of personal sector wealth for South Africa

In common with many emerging market countries, South Africa’s government does not publish balance sheet wealth estimates on a market value basis, as produced in the U.S., U.K., Japan, and elsewhere. Yet without information on the market values of liquid and illiquid personal sector wealth, it is difficult to explain aggregate consumer spending and saving, consumers’ demand for credit, and the broad money holdings of households. Behavioural equations for these variables are key components of central banks’ macro-econometric models, used in forecasting and policy-making. Understanding the domestic asset value channel of the monetary policy transmission mechanism is especially important for inflation targeting countries. We construct the first coherent set of aggregate, personal sector wealth estimates at market value for South Africa. Our quarterly estimates derive from published data on financial flows, and various other capital market data, often at book value. Our methods rely, where relevant, on accumulating flow of funds data using appropriate benchmarks, and, where necessary, converting book to market values using appropriate asset price indices. Relating asset to income ratios for various asset classes to asset price movements and rates of return, throws light on the changing composition of personal sector wealth. Most striking are the rise in pension wealth - overtaking gross housing assets in the late 1980s; the rise in household debt; and the relative decline of liquid and housing assets, from the early and mid-1980s, respectively.