House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

Gelain, Paolo; Lansing, Kevin J.; Mendicino, Caterina

doi:10.24148/wp2012-11

“…20 This amortization rate implies that the duration of mortgage loans in the model is around 73.8 quarters (i.e., 18.5 years). 21 This is largely consistent with, albeit slightly less than, AHS data, which imply that the average remaining term of all outstanding loans is around 19.6 years. Data in Kennedy (2005, 2007) imply that the ratio of repayments resulting from re…nance originations to the stock of mortgages averaged around 4.4 percent between 1991 and 2005, implying an interest rate duration of around 7.8 years.…”

Section: Steady-state Targets and Other Restrictions Imposed On The Esupporting

confidence: 77%

Addressing household indebtedness: Monetary, fiscal or macroprudential policy?

Alpanda

¹

,

Zubairy

²

2017

European Economic Review

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. iii Terms of use: Documents in AbstractIn this paper, we build a dynamic stochastic general-equilibrium model with housing and household debt, and compare the effectiveness of monetary policy, housing-related fiscal policy, and macroprudential regulations in reducing household indebtedness. The model features long-term fixed-rate borrowing and lending across two types of households, and differentiates between the flow and the stock of household debt. We use Bayesian methods to estimate parameters related to model dynamics, while level parameters are calibrated to match key ratios in the U.S. data. We find that monetary tightening is able to reduce the stock of real mortgage debt, but leads to an increase in the household debt-toincome ratio. Among the policy tools we consider, tightening in mortgage interest deduction and regulatory loan-to-value (LTV) are the most effective and least costly in reducing household debt, followed by increasing property taxes and monetary tightening. Although mortgage interest deduction is a broader tool than regulatory LTV, and therefore potentially more costly in terms of output loss, it is effective in reducing overall mortgage debt, since its direct reach also extends to home equity loans. JEL classification: E52, E62, R38 Bank classification: Housing; Transmission of monetary policy; Financial system regulation and policies; Economic models RésuméDans cette étude, les auteurs construisent un modèle d'équilibre général dynamique et stochastique intégrant le logement et la dette des ménages, et comparent l'efficacité de diverses mesures (politique monétaire, fiscalité relative au logement et réglementation macroprudentielle) pour réduire l'endettement des ménages. Le modèle incorpore les emprunts et les prêts à taux fixe à long terme se rapportant à deux types de ménages, et établit une distinction entre les flux de crédit et l'encours de la dette. Les auteurs utilisent des méthodes bayésiennes pour estimer les paramètres liés à la dynamique du modèle, et les paramètres de niveau sont calibrés de manière à ce qu'ils correspondent aux ratios clés calculés à partir de données sur l'économie américaine. Ils constatent que le resserrement de la politique monétaire peut induire une baisse de l'encours de la dette hypothécaire réelle, mais entraîner une augmentation du ratio de la dette au revenu des ménages. Parmi les mesures prises en considération, la réduction de la déduction fiscale au titre des intérêts hypothécaires et l...

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“…Using an estimated New Keynesian DSGE model, Levine, et al (2012) find that the fraction of agents who employ a moving-average type forecast rule lies in the range of 0.65 to 0.83. Gelain, et al (2013) show that the introduction of simple moving-average forecast rules for a subset of agents can significantly magnify the volatility and persistence of house prices and household debt in a standard DSGE model with housing. Granziera and Kozicki (2012) show that a simple Lucastype asset pricing model with backward-looking, extrapolative-type expectations can roughly match the run-up in U.S. house prices from 2000 to 2006 as well as the subsequent sharp downturn.…”

Section: Related Literaturementioning

confidence: 99%

House Prices, Expectations, and Time-Varying Fundamentals

Gelain¹,

Lansing

²

2014

ERWP

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We investigate the behavior of the equilibrium price-rent ratio for housing in a standard asset pricing model and compare the model predictions to survey evidence on the return expectations of real-world housing investors. We allow for time-varying risk aversion (via external habit formation) and time-varying persistence and volatility in the stochastic process for rent growth, consistent with U.S. data for the period 1960 to 2013. Under fully-rational expectations, the model significantly underpredicts the volatility of the U.S. price-rent ratio for reasonable levels of risk aversion. We demonstrate that the model can approximately match the volatility of the price-rent ratio in the data if near-rational agents continually update their estimates for the mean, persistence and volatility of fundamental rent growth using only recent data (i.e., the past 4 years), or if agents employ a simple moving-average forecast rule for the price-rent ratio that places a large weight on the most recent observation. These two versions of the model can be distinguished by their predictions for the correlation between expected future returns on housing and the pricerent ratio. Only the moving-average model predicts a positive correlation such that agents tend to expect high future returns when prices are high relative to fundamentals-a feature that is consistent with a wide variety of survey evidence from real estate and stock markets.

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“…The IMF claims that by responding to financial shocks (a relaxation in lending standards), a credit-augmented rule does indeed outperform the baseline Taylor rule regarding inflation and output variance, whereas in the case of productivity shocks, the standard rule is superior. 25 Still more skeptical are Gelain et al (2013) as they consider the issue of credit and monetary policy in a setting of bounded rationality. A fraction of household decisions are formed by a weighted average between rational and adaptive expectations in the DSGE model.…”

Section: Taylor Rules With Credit/leveragementioning

confidence: 99%

The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone

Käfer

¹

2014

Review of Economics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe question of whether central banks should bear responsibility for financial stability is still unanswered. Regarding interest rate implementation, it is thus not clear if and how the Taylor rule should be augmented by an additional financial stability term. This paper reviews the normative and positive literature on Taylor rules augmented with exchange rates, asset prices, credit, and spreads. These measures have developed as common indicators of financial (in)stability in the Taylor rule literature. In addition, our own analysis describes the development of these indicators for the core and the periphery of the Eurozone. Given the large degree of heterogeneity between euro area countries, the conclusion here is that an interest rate reaction to instability by the European Central Bank would be inappropriate in times of crisis. However, this conclusion is somewhat weakened if there is no crisis. JEL Classification:E52, F33, F42

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House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

Cited by 19 publications

References 69 publications

Addressing household indebtedness: Monetary, fiscal or macroprudential policy?

Addressing household indebtedness: Monetary, fiscal or macroprudential policy?

House Prices, Expectations, and Time-Varying Fundamentals

The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone

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