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Household debt, house prices and consumption in the United Kingdom: a quantitative theoretical analysis

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  • Waldron, Matt

    ()
    (Bank of England)

  • Zampolli, Fabrizio

    ()
    (Bank of England)

Abstract

Household debt and house prices in the United Kingdom rose substantially between 1987 and 2006. In this paper we use a calibrated overlapping generations model of the household sector to examine the extent to which changes in demographics, lower inflation, and a lower long-run real interest rate may explain the build-up of debt and the rise in house prices over that period. Our model suggests that lower real interest rates were particularly important. If households expected lower real interest rates to persist, then the model can more than explain the rise in debt and can explain most of the rise in house prices. However, the model leaves a puzzle because it predicts that an unanticipated fall in real interest rates should lead to a consumption boom that did not materialise in the data.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 379.

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Length: 55 pages
Date of creation: 10 Mar 2010
Date of revision:
Handle: RePEc:boe:boeewp:0379

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Keywords: Consumption; housing market; collateral constraints; life cycle; OLG;

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References

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Citations

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Cited by:
  1. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
  2. Shaofeng Xu, 2013. "An Equilibrium Analysis of the Rise in House Prices and Mortgage Debt," Working Papers, Bank of Canada 13-9, Bank of Canada.
  3. Hanna Augustyniak & Laszek Jacek & Krzysztof Olszewski & Joanna Waszczuk, 2013. "Modelling of cycles in the residential real estate market – interactions between the primary and the secondary market and multiplier effects," National Bank of Poland Working Papers, National Bank of Poland, Economic Institute 143, National Bank of Poland, Economic Institute.

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