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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 response of the economies of 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, and we are thus able to document the importance of a wealth/balance sheet channel for consumption and an equity finance channel forinvestment. 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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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 014.

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Date of creation: Nov 2004
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Handle: RePEc:dnb:dnbwpp:014

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Keywords: Monetary policy; Asset prices; structural VAR. JEL codes: E44; E52; E2;

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Cited by:
  1. Elmer Sterken, 2006. "Competition in the Dutch Mortgage Market," De Economist, Springer, vol. 154(4), pages 587-600, December.
  2. Fabio C. Bagliano & Claudio Morana, 2010. "The Great Recession: US dynamics and spillovers to the world economy," ICER Working Papers - Applied Mathematics Series 34-2010, ICER - International Centre for Economic Research.
  3. Afonso, António & Sousa, Ricardo M., 2009. "The macroeconomic effects of fiscal policy," Working Paper Series 0991, European Central Bank.
  4. 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.
  5. Vítor Castro & Ricardo M. Sousa, 2010. "How Do Central Banks React to Wealth Composition and Asset Prices?," NIPE Working Papers 26/2010, NIPE - Universidade do Minho.
  6. 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.
  7. Fabio C. Bagliano & Claudio Morana, 2011. "Macro-finance interactions in the US: A global perspective," Working papers 23, Former Department of Economics and Public Finance "G. Prato", University of Torino.
  8. Guarda, Paolo & Jeanfils, Philippe, 2012. "Macro-Financial Linkages: evidence from country-specific VARs," CEPR Discussion Papers 8875, C.E.P.R. Discussion Papers.
  9. Beltratti, Andrea & Morana, Claudio, 2010. "International house prices and macroeconomic fluctuations," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 533-545, March.
  10. 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.

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