WEALTH, CREDIT CONDITIONS, AND CONSUMPTION: EVIDENCE FROM SOUTH AFRICA

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.