Abstract:
This paper develops and estimates an open economy dynamic stochastic
general equilibrium model of South Africa. We devote special attention to
the impact of stock price wealth effects on output and the interest rate. For
this reason we adopt a perpetual youth approach, which allows for a limited
decision horizon. We estimate the model using Bayesian techniques and
find that (i) about 9 percent of the volatility in production can be explained by
financial shocks, and (ii) the SARB does not and should not react on stock
price disturbances. Moreover, stock prices seem to be unaffected by shocks
from the real economy.
