Monetary and macroprudential policy adopted in a model with house price booms.

Abstract

The coordination of monetary and macroprudential policies in stabilising housing market shocks continues to be a critical unresolved debate. This leaves Africa's high-debt emerging markets vulnerable to systemic risks and housing wealth volatility. There is a growing body of literature exploring new policy instruments that could be more effective in achieving financial stability. This need for efficiency and the correct macroprudential instrument underpins this study, which focuses on testing the joint use of two macroprudential instruments alongside monetary policy. To address this gap, the study employs a DSGE model calibrated for South Africa’s literature. Furthermore, the study assumes a closed economy and thereby assesses the effectiveness of monetary policy and the macroprudential tools (LTV and CCyB) during house price booms. Findings suggest that coordination reduces house price volatility, where LTV is more effective in stabilising domestic credit and countercyclical buffers addressing external shocks; however, South Africa's housing market differences result in uneven effectiveness across income groups.