the collateral channel how real estate shocks affect corporate investment abstract what is the impact of real estate prices on corporate investment in the presence of financing frictions firms use pledgeable assets as collateral to finance new projects through this collateral channel shocks to the value of real estate can have a large impact on aggregate investment to compute the sensitivity of investment to collateral value we use local variations in real estate prices as shocks to the collateral value of firms that own real estate over the 1993 2007 period the representative us corporation invests 0 06 out of each 1 of collateral jel d22 g31 r30

the debt payment to income ratio as an indicator of borrowing constraints evidence from two household surveys liquidity constraints have been proposed as an important explanation for deviations from the rational expectations permanent income hypothesis this paper introduces to the liquidity constraint literature the ratio of a household s debt payments to its disposable personal income the debt service ratio dsr we find that a household with a high dsr is significantly more likely to be turned down for credit than other households also the consumption growth of likely constrained households identified using the dsr along with the liquid asset to income ratio is significantly more sensitive to past income than that of other households confirming the dsr s value in identifying constrained households

testing for unbiasedness of term structure and interest differentials as predictors of future inflation changes and inflation differentials this paper argues that the unbiasedness of interest differentials as predictors of future inflation differentials and of the term structure as a predictor of future inflation changes are independent propositions the first requires rational expectations re and equality of ex ante real interest rates which holds only in the presence of uncovered interest parity uip and ex ante purchasing power parity ppp the second is correct if in addition to re the fisher hypothesis and co nstancy of ex ante real rates are satisfied the issue of the information contained in the term structure of interest rates is important because if the relationship between interest rates for different maturities could help predict future inflation the yield curve could be a guide for monetary policy fama s 1975 seminal paper found that real interest rates are constant over time with fluctuations in nominal rates mainly reflecting changes in expected inflation the so called fisher effect on the contrary mishkin 1984a rejected the constancy of real rates and the existence of a fisher effect in a number of oecd countries as for the hypothesis that interest differentials are unbiased predictors of future inflation differentials it is of interest for two main reasons first the equality of real rates which is implied would mean that monetary policy is not an effective stabilization tool in an open economy as real economic activity could not be influenced through the real interest rate second real interest rate equalization across countries requires that uip and ppp be satisfied therefore it is a test of the monetary approach to exchange rates versus models which depend on real rates differing between countries in the short run amongst previous researchers mishkin 1984b could not reject the equality hypothesis in bilateral tests of the us vis a vis six industrialized

house prices home equity based borrowing and the u s household leverage crisis us household leverage sharply increased in the years preceding the 2007 eco nomic recession the top panel of figure 1 shows the steady rise in household debt since 1975 which accelerated beginning in 2002 in just five years the household sector doubled its debt balance in comparison the contemporaneous increase in corporate debt was modest the middle panel shows that the increase in household debt from 2002 to 2007 translated into a striking rise in household leverage as mea sured by the debt to income ratio during the same time period corporate leverage declined the dramatic absolute and relative rise in us household leverage from 2002 to 2007 is unprecedented compared to the last 25 years one reason for the rapid expansion in household leverage during this period is that mortgage credit became more easily available to new home buyers mian and sufi 2009 strong house price appreciation from 2002 to 2006 however which may have been fueled by the availability of mortgage credit to a riskier set of new home buyers could also have had an important feedback effect on household lever age through existing homeowners given that 65 percent of us households already owned their primary residence before the acceleration in house prices the feedback from house prices to borrowing may be an important source of the rapid rise in household leverage that preceded the economic downturn our central goals in this study are to estimate how homeowner borrowing responded to the increase in house prices and to identify which homeowners responded most aggressively we examine this home equity based borrowing channel using a dataset consisting of anonymous individual credit files of a national consumer credit bureau agency we follow a random sample of over 74 000 us homeowners who owned their homes as of 1997 at an annual frequency from the end of 1997 until the end of 2008 the bottom panel of figure 1 plots the growth in debt of 1997 homeowners over time and shows that existing homeowners borrow significantly more debt as their house prices appreciate from 2002 to 2006 while the aggregate trend is suggestive

interest rates and equity extraction during the housing boom credit record panel data from 1999 2010 indicates that the likelihood of home equity extraction borrowing on average about 40 000 against one s home peaked in 2003 when mortgage rates reached historic lows we estimate a 27 percent rise in extraction in response to a 100 basis point rate decline and that house price growth amplifies this relationship differential responses to interest rates and home price appreciation by borrower age and credit score provide new evidence of financial frictions finally equity extractions are associated with higher default risk consistent with the use of borrowed funds for consumption or illiquid investment

the uk consumption boom of the late 1980s aggregate implications of microeconomic evidence two competing explanations of the uk consumer boom in the late 1980s are the financial liberalisation imperfect housing market hypothesis of muellbauer and murphy and the expectations hypothesis of king we use 15 years of family expenditure surveys and cohort analysis to investigate to what extent these two hypotheses agree with observed changes in consumption patterns we find that the housing markets explanation accounts for much of the increase by older cohorts but cannot be reconciled with the marked rise in expenditure levels of younger households a simple simulation exercise shows instead that the expectations hypothesis can generate increases of expenditure by young consumers of the magnitude observed in our data

home is where the equity is mortgage refinancing and household consumption applying a permanent income model with exogenous liquidity constraints and mortgage behavior household refinancing when mortgage interest rates are historically high and rising a persistent empirical puzzle is explained using data from the panel study of income dynamics households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25 more likely to refinance 1991 94 on average such liquidity constrained households converted over two thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted 1991 94 producing an estimated expenditure stimulus of at least 28 billion

housing wealth and residential energy consumption abstract the housing wealth effect often manifests as a positive relationship between consumption and perceived housing wealth e g the perceived value of houses when the perceived value of a property rises homeowners may feel more comfortable and secure about their wealth causing them to spend more this study adopts a behavioural approach to verify if this relationship holds true for residential energy consumption in the uk while controlling for property characteristics and a large number of demographic socioeconomic and energy use behaviour variables we identified a significant relationship between housing wealth and energy consumption our models also considered psychological biases in energy consumption behaviours such as the framing effect our findings shed light on the behavioural aspects of housing wealth effect on residential energy consumption and demonstrate the potential to nudge households towards energy conservation most importantly we provide empirical evidence on the intriguing relationship among housing wealth residential energy consumption and fuel poverty the findings of this study are particularly helpful in designing and implementing energy consumption policies that can strike a balance between social justice and economic efficiency

house prices and consumption inequality i characterize how house price shocks affect consumption inequality using a life cycle model of housing and nonhousing consumption with incomplete markets i derive analytical expressions for the dynamics of inequalities and use these to analyze large house prices swings seen in the uk i show that movements in consumption inequality were large that they correspond with the theoretical predictions qualitatively and that the model explains a large fraction of the movements quantitatively i demonstrate the accuracy of this analysis using an extended model s full non linear solution finally accounting for house price shocks alters estimates of labour income risks using cross sectional data

are real interest rates equal across countries an empirical investigation of international parity conditions this paper conducts empirical tests of the equality of real interest rates across countries the empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative ppp or the unbiasedness of forward rate forecasts and ex ante relative ppp the evidence suggests that it is worth studying open economy macroeconomic models which allow 1 domestic real rates to differ from world rates 2 time varying risk premiums in the forward market or 3 deviations from ex ante relative ppp the relationship of real interest rates across countries is of central importance to our understanding of open economy macroeconomics in some models where there is costless international arbitrage in goods and financial assets real interest rates for comparable securities should be equal across countries this has been a feature of much of the early research in the monetary approach to exchange rates e g frenkel 11 and bilson 2 on the other hand finance theory indicates that risk premia may well differ for comparable securities denominated in different currencies solnick 27 roll and solnick 26 stulz 28 fama and farber 7 hansen and hodrick 17 and dornbusch 6 and more recent theoretical models in the exchange rate literature such as dornbusch 5 frankel 10 and mussa 24 depend on real rates differing between countries in the short run the proposition that real rates are equal across countries is worth studying

capital market integration in the pacific basin region an impulse response analysis abstract we examine the extent of capital market integration in a group of pacific basin countries following the deregulation of their markets and explore whether the financial influence of japan in the region has overtaken that of the us looking at long run comovements of real interest rates through the use of cointegration and using impulse response analysis to examine the speed of adjustment of real interest rates to long run equilibrium following a shock in one of the markets which is another indicator of the degree of capital market integration we find that these countries are closely linked with world financial markets and more so with japan than with us

booms and busts consumption house prices and expectations over much of the past 25 years house price and consumption growth have been closely synchronized three main hypotheses for this have been proposed increases in house prices raise household wealth and so their consumption house price growth reduces credit constraints by increasing the collateral available to homeowners and house prices and consumption are together influenced by common factors using microeconomic data we find that the relationship between house prices and consumption is stronger for younger than older households contradicting the wealth channel we suggest that common causality has been the most important factor linking house prices and consumption

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

real interest rate equalization some empirical evidence from the three major world financial markets this article examines the linkage of real interest rates of the three major world financial markets usa japan and the uk with the use of cointegration methods unlike previous works the investigation uses a trivariate vector autoregressive var model in which a constant term in the common stochastic trends space is excluded based on data generated after the liberalization of japan s foreign exchange market at the end of 1980 1981 1 1998 12 the article finds some empirical evidence indicating that the extent of the departure from the long run real interest rate equalization rie is not very large although the null hypothesis of the long run rie is rejected in most cases

real interest rate equalization and the integration of international financial markets abstract this paper argues that conventional regression tests of real interest rate equality may be misleading because they neglect to consider transactions costs a transactions cost band may inhibit the one to one correspondence between changes in real rates in alternative countries that is presumed by conventional tests statistical problems which may lead to incorrect inferences in conventional tests are also discussed alternative tests which overcome these limitations are developed and applied to real interest rates for ten different countries the alternative tests generate much stronger support for interest parity than is found in the existing literature

who drives real interest rates around the pacific rim the usa or japan abstract this paper investigates the relative influence of us and japanese real interest rates in the determination of local pacific rim rates where influence is defined by the presence of common stochastic trends furthermore the degree to which long run real interest parity holds is examined the cointegration testing methodology of johansen 1988 is adopted for this analysis which allows for multiple cointegrating vectors the results indicate that hong kong malaysia and taiwan are linked with both the usa and japan in terms of cointegration and positive covariation while only singapore is solely linked with the usa on the other hand korea and perhaps indonesia and thailand appear to be more closely linked with japan real interest parity holds for only the following interest rate pairs usa singapore usa taiwan and japan taiwan

the real interest rate a multi country empirical study how real interest rates behave over time is critical to our understanding of many macroeconomic issues and much recent research has pursued this question very little of the research however has focused on real interest rates outside the united states this paper is an empirical exploration of real interest rate movements in seven oecd countries from 1967 ii to 1979 ii further research is needed on real rates in other countries for several reasons not only are measures of foreign real rates of interest in their ownright but extending an analysis of real rates to other countries also has the following additional benefits it can generate more powerful statistical tests of propositions previously tested on u s data and yield information on whether results found for the u s hold up in other countries this study pursues several questions that have arisen naturally from this earlier work is the hypothesis that the real rate is constant rejected when the analysis is extended to other countries does the real rate decline with increased inflation and money growth in other countries besides the united states how reliable is the fisher effect in which nominal interestrates reflect changes in expected inflation are movements in nominal interest rates a reliable indicator of movements in real rates what kind of variationsin real interest rates are there in different countries have real rates declined from the 60s to the 70s for other countries besides the u s this abstract was borrowed from another version of this item

the effect of housing wealth losses on spending in the great recession we use panel data on a complete inventory of household spending and assets to estimate the spending response to the sharp and largely unexpected declines in house values that occurred in the great recession our study complements the existing literature on this topic by relying exclusively on longitudinal micro data on both household wealth and expenditure our data span the period 2002 2012 allowing us to separate trends in spending from innovations in response to unexpected wealth changes we find the marginal propensity to consume out of an unexpected housing wealth change to be six cents per dollar among older american households

conducting monetary policy at very low short term interest rates can monetary policy committees accustomed to describing their plans and actions in terms of the level of a short term nominal interest rate find effective means of conducting and communicating their policies when that rate is zero or close to zero the very low levels of interest rates in japan switzerland and the united states in recent years have stimulated much interesting research on this question and have led some central banks to make changes in their operating procedures and communications strategies in this paper we will give a brief overview of current thinking on the conduct of monetary policy when short term interest rates are very low or even zero monetary policy works for the most part by influencing the prices and yields of financial assets which in turn affect economic decisions and thus the evolution of the economy when the short term policy rate is at or near zero the conventional means of effecting monetary ease lowering the target for the policy rate is no longer feasible however it would be a mistake to think that monetary policy was impotent we discuss three strategies for stimulating the economy at an unchanged level of the policy rate these involve i providing assurance to investors that short rates will be kept lower in the future than they currently expect ii changing the relative supplies of securities in the marketplace by altering the composition of the central bank s balance sheet and iii increasing the size of the central bank s balance sheet beyond the level needed to set the short term policy rate at zero quantitative easing we also discuss the costs and benefits of very low interest rates an issue that bears on the question of whether the central bank should take the policy rate all the way to zero before undertaking alternative policies

tightening belts to buy a home consumption responses to rising housing prices in urban china abstract this paper measures the impact of housing price changes on household consumption at the city level using the universe of credit and debit card transactions in china from 2011 to 2013 in sharp contrast to the literature on the us housing market our analysis shows a large and negative housing price elasticity of consumption a 10 increase in housing prices would lead to a 9 reduction in non housing spending we argue that the negative elasticity is driven by the combination of a strong investment incentive in housing and heavy borrowing constraints faced by households this finding is corroborated by the fact that households increase their savings as housing prices increase our analysis suggests that the negative impact of housing price increases on consumption was an important factor behind the low growth rate in household consumption relative to the growth of disposal income during the sample period

housing wealth and consumption evidence from geographically linked microdata rising home values also raise the cost of living offsetting their impact on consumption however additional home equity collateral can loosen borrowing constraints increasing spending for households that value their current endowment of housing highly i use geographically linked microdata to exploit regional heterogeneity in housing markets and identify the causal effect of house price fluctuations on consumer spending a 1 increase in home values leads to a 0 047 increase in spending for homeowners but a negligible response for renters results reflect large responses among credit constrained households suggesting looser borrowing constraints are a primary driver of the mpc out of housing wealth

how much are car purchases driven by home equity withdrawal previous research indicates that changes in housing wealth affect consumer spending on cars we find that home equity extraction plays only a small role in this relationship consumers rarely use funds from equity extraction to purchase a car directly even during the mid 2000s housing boom this finding holds across three nationally representative household surveys we find in credit bureau data that equity extraction does lead to a statistically significant increase in auto loan originations consistent with equity extraction easing borrowing constraints in the auto loan market this channel though accounts for only a tiny share of overall car purchases

are government spending multipliers greater during periods of slack evidence from 20th century historical data a key question that has arisen during recent debates is whether government spending multipliers are larger during periods of slack some researchers and policymakers have argued that while government spending multipliers are estimated to be modest on average they might become greater during times when resources are underutilized auerbach and gorodnichenko 2012 forthcoming henceforth ag test this hypothesis and find larger multipliers dur

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

some evidence on the international inequality of real interest rates abstract this paper undertakes econometric tests of the hypothesis that ex ante real interest rates are equal across countries with highly integrated capital markets the issue is of practical importance because the violation of real rate equality is a necessary condition for monetary policy to influence the open economy through the real interest rate channel although an empirical literature concerning real rate equality already exists previous investigators have focused on pre tax real rates this paper contributes to the literature by attempting to incorporate the effects of taxation into the analysis

financial integration in the pacific basin region rip by panic attack abstract we exploit advances in panel data econometrics to test whether real interest parity holds in the pacific basin region we test for a unit root in the difference between either the us japanese or euro area real interest rate and the real interest rates from a panel of eleven pacific basin economies unlike extant studies that test for rip using panel data we use bai and ng s 2004 panic test which allows for a very general model of cross section dependence including the possibility of cross unit cointegration ignoring the possibility of cross unit cointegration can lead to severe size distortions and to an over rejection of the null hypothesis of a unit root we overturn earlier findings based on first generation panel tests and demonstrate that cross unit cointegration leads to incorrect conclusions we find that rip holds in the pacific region real interest rates converge to the us rate we find no support for the hypothesis that pacific basin real interest rates converge to either the japanese or euro area rates

the international linkage of real interest rates the european us connection abstract in this paper we present evidence on several questions regarding the movement in short term real interest rates in eight countries have ex ante real estates in the united states and europe been high during recent years has there been a link between us real rates and those in other countries can this link be quantified the basic finding in this paper is that real rates have climbed dramatically from the 1970s to the 1980s in both the european countries and the united states there is also strong evidence that there is a positive association between movements in us real rates and those in europe however european real rates typically do not move one for one with us real rates still leaving open the possibility that european monetary policy can influence domestic economic activity

international expected real interest rates new tests of the parity hypothesis and u s fiscal policy effects abstract this paper investigates the links among expected real interest rates across countries and also those between international expected real interest rates and u s fiscal policy we analyze the cross sectional mean of international ex post real interest rates as an estimator for the mean international expected real interest rate our results strongly reject the international expected real interest rate parity hypothesis reveal that u s budget deficits have no independent effects on international real rates given the impact of u s government defense spending and suggest that forces other than u s fiscal policy account for the post 1980 rise in international real rates

household borrowing constraints and residential investment dynamics abstract it is well known that residential investment leads output in the us economy the main contribution of our paper is to highlight the role of household borrowing constraints in accounting for this fact we study the role of home equity loans used to boost consumption as a channel that affects residential investment we consider a multi agent model where some home owning households face borrowing constraints that reflect home equity loans or refinancing constraints we show that the severity of the households borrowing constraints in an economy can generate this stylized fact of us residential investment dynamics interestingly the model correctly predicts coincident residential investment dynamics in countries with less severe borrowing constraints this prediction is borne out when the model is calibrated to french data

on the concavity of the consumption function at least since keynes 1935 many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases nonetheless standard perfect certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth we show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which as keynes suggested the marginal propensity to consume out of wealth or transitory income declines with the level of wealth

stock market returns and consumption this paper employs swedish data on households stock holdings to investigate how consumption responds to changes in stock market returns we instrument the actual capital gains and dividend payments with past portfolio weights unrealized capital gains lead to a marginal propensity to consume mpc of 23 percent for the bottom 50 of the wealth distribution and about 3 percent for the top 30 of the wealth distribution households consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution our findings are consistent with households treating capital gains and dividends as separate sources of income