Consumption, housing collateral and the Canadian business cycle

Abstract

How important are collateral constraints for reproducing salient features of the data? To address this question, we estimate two nested versions of a New Keynesian model: one with collateralized household debt and the frictionless version of the same model. Both versions of the model are fit to Canadian data using Bayesian methods. We argue that the presence of collateral constraints improves the performance of the model in terms of overall goodness of fit. Housing collateral helps to generate a positive correlation between consumption and house prices. Moreover, housing collateral induced spillovers boosted consumption growth during the housing market boom‐bust cycles of the late 1980s and early 2000s.

Addressing household indebtedness: Monetary, fiscal or macroprudential policy?

“…In addition, we consider the e¤ects of alternative policy tools such as …scal and macroprudential policies in our paper, and estimate model parameters related to dynamics, rather than calibrate them. 11 Gelain et al (2014), in simultaneous but independently developed work, also use the long-term debt structure introduced in Kydland et al (2012) to analyze the e¤ects of monetary policy on household debt. Our paper di¤ers from theirs in several respects as well.…”

House prices, capital inflows and macroprudential policy

“…For a similar formulation, see Aoki et al (2004) and Christensen et al (2013). From profit maximization, it is possible to derive the supply of housing…”

“…That is, they combine final goods with the existing housing stock and produce new units of installed houses and housing production is subject to an adjustment cost (i.e. Aoki et al (2004) and Christensen et al (2013)). An alternative formulation for the production of housing would require an explicit production function as for instance in Iacoviello and Neri (2010).…”

“…3 Close economy models of the housing market with borrowing constraints have been developed by Iacoviello (2005) and Campbell and Hercowitz (2005). For open economy extensions, see Christensen et al (2013) for a small open economy and Iacoviello and Minetti (2006) and Punzi (2013) for two-country economy versions, among others.…”

I feel wealthy: A major determinant of Portuguese households’ indebtedness?

“…These occurrences and the acknowledgment that within developed countries housing wealth accounts for about half of households wealth, and that it tended to move together with aggregate consumption after the II World War (Iacoviello, 2005), motivated a surge of models that study the macroeconomic impacts of housing and the housing market (e.g. Kivedal, 2014;Kuang, 2014;Christensen et al, 2016;Rubio and Carrasco-Gallego, 2016;Guerrieri and Iacoviello, 2017;Lambertini et al, 2017). In the class of DSGE models, housing is included among households' preferences, the effects of credit shocks on households' decisions are tested, and the relationship between rising house prices expectations and their actual increase is checked.…”