THE SOUTH AFRICAN ECONOMY AND ITS ASSET MARKETS

Abstract

IN THIS PAPER WE ATTEMPT to identify and measure many of the most important forces and feed back effects that link the real South African economy to the global economy and to global and domestic asset markets.We show that the essentials of the relationships between the South African economy and its domestic share and housing markets can be captured in a general equilibrium model with a relatively small number of equations.Despite the simplicity of its structure, convenient for heuristic purposes, it is demonstrated that the model can consistently forecast the turning points in the growth rate of an important set of economic variables up to one-year ahead.The model is distinctive in that it incorporates wealth effects proxied by the cycle of the domestic share market and domestic housing market to help explain the growth in private consumption and investment spending.The model also incorporates the important feed back loops between the balance of payments, interest rates and the growth in the money supply.The paper has the following structure.In section 1 we offer a description of the South African business and

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