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Consumption Dynamics, Housing Collateral and Stabilisation Policies: A Way Forward for Policy Co-Ordination?

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Abstract
We decompose aggregate consumption of heterogeneous consumers by modelling both savers and their links to collateral constrained borrowers through a bank which prices credit risk. Savers own both firms and the commercial bank while borrowers require loans from the commercial bank to e¤ect their consumption plans. The bank lends at a premium over the interest rate on central bank money in proportion to the riskiness of loans, the demand for loans, the asset price and the quantity of housing collateral. We show that even though house prices do not represent wealth, aggregate consumption is closely related to movements in house prices. House price-induced changes may lead to large variations in household spending via the collateral effect with important policy implications. We consider the case for jointly determined macro-prudential, fiscal and monetary policies in order to minimise losses for a representative household. We also analyse the implications when there is uncertainty over some of the policy parameters such as the loan default rate.

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  • Jagjit S. Chadha & Germana Corrado & Luisa Corrado, 2018. "Consumption Dynamics, Housing Collateral and Stabilisation Policies: A Way Forward for Policy Co-Ordination?," CEIS Research Paper 433, Tor Vergata University, CEIS, revised 03 May 2018.
    • Handle: RePEc:rtv:ceisrp:433
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    More about this item

    Keywords

    Heterogeneous households; Credit constraints; Housing collateral; Asset prices; Bank lending; Macro-prudential tools; Fiscal and monetary policy.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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