Housing, Banking and the Macro Economy

• Main Author: Nilavongse, Rachatar
• Format: Doctoral Thesis
• Language: English
• Published: Uppsala universitet, Nationalekonomiska institutionen 2016
• Subjects: House price expectations; Debt default; Boom-bust cycles; Monetary policy; Inflation; Welfare analysis; Credit supply disruptions; Working capital; DSGE models
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-281896; http://nbn-resolving.de/urn:isbn:978-91-85519-66-8

Essay 1: Expectation-Driven House Prices, Debt Default and Inflation Dynamics We contribute to the literature on dynamic stochastic general equilibrium (DSGE) models with housing collateral by including shocks to house price expectations. We also incorporate endogenous mortgage defaults that are rarely included in DSGE models with housing collateral. We use this model to study the effects of variations in house price expectations on macroeconomic dynamics and their implications for monetary policy. Model simulations show that an increase in expected future house prices leads to a decline in mortgage default rate and interest rates on household and business loans, whereas it leads to an increase in house prices, housing demand, household debt, business debt, bank leverage ratio and economic activity. In contrast to previous studies, we find that inflation is low during a house price boom. Finally, we show that monetary policy that takes into account household credit growth reduces the volatility of output and dampens a rise in housing demand, household debt and bank leverage ratio that enhances financial stability. However, a central bank that reacts to household credit growth increases the volatility of inflation. === Essay 2: House Price Expectations, Boom-Bust Cycles and Implications for Monetary Policy This essay examines the role of household expectations about future house prices and their implications for boom-bust cycles and monetary policy. Our findings are as follows. First, waves of optimism and pessimism about future house prices generate boom-bust cycles in house prices, financial activities (household debt, business debt, bank leverage, interest rates on household and business loans) and the real economy (housing demand, consumption, employment, investment and output). Second, we find that inflation declines during a house price boom and increases during a house price burst. Third, we find that monetary policy that reacts to household credit growth reduces the magnitude of boom-bust cycles and improves household welfare. Fourth, we find that the case for taking into account household credit growth becomes stronger in an economy in which the bank capital to asset ratio requirement is low, interest rates on loans and deposits adjust immediately to changes in the policy rate, or the household sector is highly indebted. === Essay 3: Credit Disruptions and the Spillover Effects between the Household and Business Sectors This essay examines the effects of credit supply disruptions in a New Keynesian DSGE model with housing collateral and working capital channels. A tightening of business credit conditions creates negative spillovers from the business sector to the household sector through labor income and housing collateral channels. A tightening of household credit conditions has negative spillover effects on the business sector via the housing collateral channel. We find that spillovers are more sensitive to changes in leverage where the shock occurs. A negative business credit shock creates upward pressure on inflation, whereas a negative household credit shock creates downward pressure on inflation. The working capital channel magnifies the response of inflation to a business credit shock, whereas it dampens the response of inflation to a household credit shock.