Finance and Business Cycles: The Credit-Driven Household Demand Channel

Abstract

for comments that substantially improved the draft. We thank Michael Varley for excellent research assistance. We also thank the Julis Rabinowitz Center for Public Policy and Finance at Princeton and the Initiative on Global Markets and the Fama-Miller Center at Chicago Booth for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Income Expectations, Credit to Households, and Property Prices: Evidence From Indonesia and Brazil

“…Shocks in economic performance (GDP) and private consumption expenditures affect household credit in Indonesia. This result is consistent with the finding of Mian and Sufi (2018), who suggest that an optimism shock has led to a rise in house prices, with credit merely following the rise in house prices. In the Brazilian economy, shock in income expectations have no impact on property prices, whereas property prices respond significantly to shocks in the GDP and private consumption expenditures.…”

“…The shocks to income expectations, economic performance and private consumption expenditures affect household credit in Indonesia. This finding is consistent with that of Mian and Sufi (2018), who suggest that an optimism shock leads to an increase in house price, with credit merely follows the increase in house price. Similarly, house prices respond to both income expectations and economic performance.…”

“…Thus, the general consensus is that, given a positive economic outlook, banks relax their lending standards, but restrict them when the economy undergoes a downswing. Further, Mian and Sufi (2018) argue that the interaction between house prices and credit supply expansion has led to the question of whether the increase in house prices is the initial shock and the rise in household debt a response, as argued by Laibson and Mollerstrom (2010), Foote, Girardi, and Willen (2012), and Adelino, Schoar, and Severino (2017). Mian and Sufi (2018) further suggest that an "optimism" shock leads to a rise in house prices, where credit merely follows.…”

The Bank of Canada and Financial Stability: A New Mandate?,

“…26 Beyond the considerations discussed above, there is another complication stemming from the tension between the inflation control and financial stability objectives raised in the Bank of Canada's medium-term research program. If there exists a financial cycle whose amplitude and duration differs from the well-known business cycle (Borio 2014), but has some predictive ability to forecast it (Mian andSufi 2018, Borio, Drehmann andXia 2018), then it becomes much more difficult to perform the balancing act between policies meant to avoid the build-up of financial imbalances versus the desire to use monetary policy to ensure price stability.…”

A Theory of Housing Demand Shocks

“…For more empirical studies that stress the importance of credit supply shocks in housing boombust cycles, see the survey of Mian and Sufi (2018) and the references therein.…”