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Asset Price Shocks, Real Expenditures, and Financial Structure: A Multi-Country Analysis

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  • Robert S. Chirinko
  • Leo de Haan
  • Elmer Sterken

Abstract

This paper examines the responses of private consumption, residential investment, and business investment in 11 EU countries, Japan, and the United States to shocks in housing and equity prices. The effects are assessed with a Structural Vector Auto Regressive (SVAR) model, and four key findings emerge. First, the impacts of asset price shocks are heterogeneous across countries. Second, these heterogeneous responses are systematically related to cross-country variation in financial structure. We are thus able to document the importance of a wealth/balance sheet channel for private consumption and residential investment and an equity finance channel for business investment. Third, for a given country, housing shocks have a much greater impact than equity shocks. Fourth, variance decompositions indicate that monetary policy reacts to equity price shocks but not to housing price shocks. These results highlight the important role played by asset prices on real activity and fuel the debate about the inclusion of asset prices in the formulation of monetary policy.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-07/cesifo1_wp2342.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2342.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2342

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Keywords: monetary policy; asset prices; structural VAR;

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  1. Iacoviello, Matteo, 2000. "House prices and the macroeconomy in Europe: Results from a structural var analysis," Working Paper Series 0018, European Central Bank.
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Cited by:
  1. Paolo Guarda & Philippe Jeanfils, 2012. "Macro-financial linkages: Evidence from country-specific VARs," BCL working papers 71, Central Bank of Luxembourg.
  2. Andrea Beltratti & Claudio Morana, 2008. "International shocks and national house prices," ICER Working Papers - Applied Mathematics Series 14-2008, ICER - International Centre for Economic Research.
  3. Beltratti, Andrea & Morana, Claudio, 2010. "International house prices and macroeconomic fluctuations," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 533-545, March.
  4. Ricardo M. Sousa & António Afonso, 2008. "The Macroeconomic Effects of Fiscal Policy," NIPE Working Papers 22/2008, NIPE - Universidade do Minho.
  5. Bagliano, Fabio C. & Morana, Claudio, 2012. "The Great Recession: US dynamics and spillovers to the world economy," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 1-13.
  6. Elmer Sterken, 2006. "Competition in the Dutch Mortgage Market," De Economist, Springer, vol. 154(4), pages 587-600, December.
  7. Marco Del Negro & Christopher Otrok, 2005. "Monetary policy and the house price boom across U.S. states," Working Paper 2005-24, Federal Reserve Bank of Atlanta.
  8. Vitor Castro & Ricardo M. Sousa, 2010. "How Do Central Banks React to Wealth Composition and Asset Prices?," GEMF Working Papers 2010-19, GEMF - Faculdade de Economia, Universidade de Coimbra.
  9. Vansteenkiste, Isabel, 2007. "Regional housing market spillovers in the US: lessons from regional divergences in a common monetary policy setting," Working Paper Series 0708, European Central Bank.
  10. Fabio C. Bagliano & Claudio Morana, 2012. "Macro-Finance Interactions in the US: A Global Perspective," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.

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