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Tobin Lives: Integrating evolving credit market architecture into flow of funds based macro-models

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  • John Muellbauer
  • John Duca

Abstract

After the global financial crisis, there is greater awareness of the need to understand the interactions between the financial sector and the real economy and hence the potential for financial instability.� Data from the financial flow of funds, previously relatively neglected, are now seen as crucial to the data monitoring carried out by central banks.� This paper revisits earlier efforts to understand financial-real linkages, such as those of Tobin and the Yale School, and proposes a modelling framework for analysing the household flow of funds jointly with consumption.� The consumption function incorporates household income, portfolios of assets and debt held at the end of the previous period, credit availability, and asset prices and interest rates.� In a general equilibrium setting, these all have to be endogenised and since households make consumption and housing purchase decisions jointly with portfolio decisions, there is much to be gained in modelling a household sub-system of equations.� Major evolutionary structural change - namely the evolving credit architecture facing households - is handled by our 'Latent Interactive Variable Equation System'.� A by-product is improved understanding of the secular decline in US saving rate, as well as of the household financial accelerator.� Moreover, the models discussed in this paper offer new ways of interpreting data on credit, money and asset prices, which are crucial for central banks.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 622.

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Date of creation: 16 Sep 2012
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Handle: RePEc:oxf:wpaper:622

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Keywords: Finance and the real economy; Financial crisis; Consumption; Credit constraints; Financial frictions; Household portfolios; Wealth effects; Modeling the flow of funds;

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  1. Paul Bennett & Richard Peach & Stavros Peristiani, 1998. "Structural change in the mortgage market and the propensity to refinance," Staff Reports 45, Federal Reserve Bank of New York.
  2. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
  3. Janine Aron & John V. Duca & John Muellbauer & Keiko Murata & Anthony Murphy, 2010. "Credit, housing collateral and consumption: evidence from the UK, Japan and the US," Working Papers 1002, Federal Reserve Bank of Dallas.
  4. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  5. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  6. David Blake, 2004. "Modelling the composition of personal sector wealth in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 14(9), pages 611-630.
  7. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
  8. David Backus & Douglas D. Purvis, 1978. "An Integrated Model of Household Flow-of-Funds Allocations," Cowles Foundation Discussion Papers 493, Cowles Foundation for Research in Economics, Yale University.
  9. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
  10. Janine Aron & John Muellbauer, 2013. "Wealth, Credit Conditions, and Consumption: Evidence from South Africa," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 59, pages S161-S196, October.
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Cited by:
  1. Tony Hall & Jan Jacobs & Adrian Pagan, . "Macro-Econometric System Modelling @75," NCER Working Paper Series 95, National Centre for Econometric Research.
  2. John Muellbauer, 2012. "When is a housing market overheated enough to threaten stability?," Economics Series Working Papers 623, University of Oxford, Department of Economics.

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