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The Financial Accelerator: Evidence from International Housing Markets

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  • Heitor Almeida
  • Murillo Campello
  • Crocker Liu
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    Abstract

    This paper shows novel evidence on the mechanism through which financial constraints amplify fluctuations in asset prices and credit demand. It does so using contractual features of housing finance. Among agents whose housing demand is constrained by the availability of collateral, those who can borrow against a larger fraction of their housing value (achieve a higher loan-tovalue, or LTV, ratio) have more procyclical debt capacity. This procyclicality underlies the financial accelerator mechanism. Our study uses international variation in LTV ratios over three decades to test whether (a) housing prices and (b) demand for new mortgage borrowings are more sensitive to income shocks in countries where households can achieve higher LTV ratios. The results we obtain are consistent with the dynamics of a collateral-based financial accelerator in international housing markets. Copyright Oxford University Press 2006

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    Bibliographic Info

    Article provided by European Finance Association in its journal Review of Finance.

    Volume (Year): 10 (2006)
    Issue (Month): 3 (September)
    Pages: 321-352

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    Handle: RePEc:oup:revfin:v:10:y:2006:i:3:p:321-352

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    Cited by:
    1. Bruno Coric, 2011. "The financial accelerator effect: concept and challenges," Financial Theory and Practice, Institute of Public Finance, vol. 35(2), pages 171-196.
    2. Yunyong Thaicharoen & Sra Chuenchoksan & Ashvin Ahuja, 2007. "Big elephants in small ponds: Risk absorption, risk diversification and management of capital flows," Working Papers 2007-02, Economic Research Department, Bank of Thailand.
    3. Emmanuel De Veirman & Ashley Dunstan, 2008. "How do Housing Wealth, Financial Wealth and Consumption Interact? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/05, Reserve Bank of New Zealand.
    4. Holly, Sean & Pesaran, M. Hashem & Yamagata, Takashi, 2010. "A spatio-temporal model of house prices in the USA," Journal of Econometrics, Elsevier, vol. 158(1), pages 160-173, September.
    5. Christian Dreger & Konstantin A. Kholodilin, 2011. "An Early Warning System to Predict the House Price Bubbles," Discussion Papers of DIW Berlin 1142, DIW Berlin, German Institute for Economic Research.
    6. Stolbov, M., 2012. "Financial Accelerator Theory and the Russian Mortgage Market," Journal of the New Economic Association, New Economic Association, vol. 13(1), pages 79-98.
    7. Yi Jin & Charles K.Y. Leung & Zhixiong Zeng, 2012. "Real Estate, the External Finance Premium and Business Investment: A Quantitative Dynamic General Equilibrium Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40(1), pages 167-195, 03.
    8. Bank for International Settlements, 2012. "Operationalising the selection and application of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 48.
    9. International Monetary Fund, 2011. "Policy Instruments To Lean Against The Wind In Latin America," IMF Working Papers 11/159, International Monetary Fund.
    10. International Monetary Fund, 2011. "Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences," IMF Working Papers 11/238, International Monetary Fund.
    11. Konstantin A. Kholodilin & Jan-Oliver Menz & Boriss Siliverstovs, 2007. "What Drives Housing Prices Down?: Evidence from an International Panel," Discussion Papers of DIW Berlin 758, DIW Berlin, German Institute for Economic Research.
    12. Ono, Arito & Uchida, Hirofumi & Udell, Gregory & Uesugi, Iichiro, 2013. "A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market," Working Paper Series 19, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.
    13. Koetter, Michael & Poghosyan, Tigran, 2010. "Real estate prices and bank stability," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1129-1138, June.
    14. Philip Arestis & Ana Rosa Gonzalez, 2013. "Endogenous Bank Credit and Its Link to Housing in OECD Countries," Economics Working Paper Archive wp_750, Levy Economics Institute, The.

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