House prices, consumption, and monetary policy: a financial accelerator approach

Kosuke Aoki, James Proudman and Gertjan Vlieghe

Bank of England working papers from Bank of England

Abstract: There is a live debate about the role of house prices in the transmission mechanism of monetary policy. Do house prices merely reflect macroeconomic conditions, or are there important feedback effects from house prices to other economic variables? A general equilibrium model is considered, where asymmetric information problems create frictions in credit markets used by households. In particular, the financial accelerator mechanism of Bernanke, Gertler and Gilchrist is applied to the household sector. In the economy modelled, houses serve two purposes: they provide a stream of housing services to consumers, and they serve as collateral to lower the agency costs related to borrowing. It is shown that under certain conditions this amplifies and propagates the effect of monetary policy shocks on housing investment, house prices and consumption. The effect of a structural change in credit markets that lowers the transaction costs of additional borrowing against housing equity is also considered. It is shown that such a change would increase the effect of monetary policy shocks on consumption, but would decrease the effect of monetary policy shocks on house prices and housing investment.

Date: 2002-12
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Related works:
Journal Article: House prices, consumption, and monetary policy: a financial accelerator approach (2004)
Working Paper: House prices, consumption, and monetary policy: a financial accelerator approach (2003)
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