Causality between economic policy uncertainty and real housing returns in emerging economies: A cross-sample validation approach

Abstract

This paper examines whether economic policy uncertainty (EPU) causes real housing returns in 8 emerging economies for which EPU data are available namely: Brazil, Chile, China, India, Ireland, Russia, South Africa and South Korea. Quarterly data were used for the analysis. The study uses cross-sample validation (CSV) Granger causality approach which obviates the need to partition the data into an in-sample and out-of-sample periods when limited data are available as in this study. Results based on the CSV full sample period indicate no evidence of economic policy uncertainty Granger causing real housing returns except for Chile and China. However, based on CSV rolling window results, there is evidence of time varying causality in all the countries except India. The implications of these findings are drawn.

Keywords:

• economic policy uncertainty
• housing returns
• cross-sample validation causality
• in-sample
• post-sample
• rolling window

JEL classification:

• C32
• C53
• G10
• G17

PUBLIC INTEREST STATEMENT

The recent global crisis which stated in the housing market in the United States has raised the interest of all the stakeholders. Moreover, as the housing market is still struggling to recover from the aftermath of the crisis, it has become important to examine its drivers. Uncertainty surrounding economic policies is envisaged to be among these because such uncertainty could delay investment in the housing market as investors would either adopt a wait- and-see strategy or divert their investment to other portfolios. In this paper, the role of economic policy uncertainty (EPU) on real housing returns in 8 emerging markets was investigated using a robust analytical method. The findings show that EPU has significant causal effect on real housing returns. This effect varies over time. This should raise concern for investors, policymakers and researchers since development in the housing market could impact economic growth and welfare distribution.

Notes

1. Please see Balcilar, Gupta, Kyei, and Wohar (2016a) for a review of the relationship between uncertainty and other economic and financial variables.

2. More technical details can be found in Ashley and Tsang (2014).

3. However, it is noted that when the underlying variables in levels are cointegrated, the model in first differences is mis-specified unless it allows for error-correction which then permits a long-run analysis. Therefore, the Johansen-based contegration is performed. Results as shown in the Appendix A indicate absence of cointegration at 5% level Therefore, the model with stationary series is not mis-specified.

Additional information

Funding

The author received no direct funding for this research.

Notes on contributors

Goodness C. Aye

Dr. Goodness C. Aye holds a PhD in Agricultural Economics from University of Pretoria. She obtained her Bachelors and Masters Degrees in the same field. She is a Senior Lecturer and Researcher with interest in agricultural and economic policy analysis, financial markets, development, energy and environmental economics as well as applied econometrics. She has over 100 publications covering these areas. She has presented papers in conferences in many continents of the world. She is a reviewer and editor for high ranking local and international journals. She teaches and supervises both undergraduate and graduate students. Above all, she is married and blessed with children whose love has enabled her to succeed in her career. The current research on the role of economic policy uncertainty on real housing returns in emerging economies demonstrates her quest for stable and effective fiscal, monetary and regulatory policies that would foster economic growth and welfare.