The second is that unlike the UK, Scandinavia, Mexico and other countries, South Africa s financial liberalization occurred without an asset price boom, thus illuminating the direct role of financial liberalization. Previous attempts to model financial liberalization are not fully satisfactory. Our methodological innovation is to treat financial liberalization as an unobservable, proxied by a spline function, and entering both consumption and debt equations, which are jointly estimated. We also clarify the multi-faceted effects of financial liberalization on consumption. The empirical results corroborate the theory in the paper, confirming the importance for consumer spending of extensive financial liberalization, of fluctuations in a range of asset values and asset accumulation, and of income expectations.
Results suggest that households largely pierce the corporate veil.
The paper also throws important light on the monetary policy transmission mechanism in South Africa.