IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

House prices, consumption, and monetary policy: a financial accelerator approach

  • Aoki, Kosuke
  • Proudman, James
  • Vlieghe, Gertjan

There is a live debate about the role of house prices in the transmission mechanism of monetary policy. Do house prices merely reflect macroeconomic conditions, or are there important feedback effects from house prices to other economic variables? A general equilibrium model is considered, where asymmetric information problems create frictions in credit markets used by households. In particular, the financial accelerator mechanism of Bernanke, Gertler and Gilchrist is applied to the household sector. In the economy modelled, houses serve two purposes: they provide a stream of housing services to consumers, and they serve as collateral to lower the agency costs related to borrowing. It is shown that under certain conditions this amplifies and propagates the effect of monetary policy shocks on housing investment, house prices and consumption. The effect of a structural change in credit markets that lowers the transaction costs of additional borrowing against housing equity is also considered. It is shown that such a change would increase the effect of monetary policy shocks on consumption, but would decrease the effect of monetary policy shocks on house prices and housing investment.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 13 (2004)
Issue (Month): 4 (October)
Pages: 414-435

in new window

Handle: RePEc:eee:jfinin:v:13:y:2004:i:4:p:414-435
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Rudebusch, Glenn D & Svensson, Lars E O, 1998. "Policy Rules for Inflation Targeting," CEPR Discussion Papers 1999, C.E.P.R. Discussion Papers.
  2. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  3. repec:att:wimass:9722 is not listed on IDEAS
  4. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  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. anonymous, 2001. "Monetary policy report to the Congress, July 18, 2001," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Aug, pages 501-527.
  7. Bennett T. McCallum & Edward Nelson, 1998. "Performance of operational policy rules in an estimated semi-classical structural model," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  8. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 295-330, 03.
  9. Sydney Ludvigson, 1999. "Consumption And Credit: A Model Of Time-Varying Liquidity Constraints," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 434-447, August.
  10. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2059-2094, September.
  11. Christopher D. Carroll, 1991. "Buffer stock saving and the permanent income hypothesis," Working Paper Series / Economic Activity Section 114, Board of Governors of the Federal Reserve System (U.S.).
  12. Iacoviello, Matteo & Minetti, Raoul, 2000. "The Credit Channel of Monetary Policy and Housing Markets: International Empirical Evidence," Research Discussion Papers 14/2000, Bank of Finland.
  13. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  14. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
  15. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," Berkeley Program on Housing and Urban Policy, Working Paper Series qt28d3s92s, Berkeley Program on Housing and Urban Policy.
  16. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  17. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  18. Pierre-Olivier Gourinchas, 2000. "Precautionary Savings, LifeCycle and Macroeconomics," Econometric Society World Congress 2000 Contributed Papers 0793, Econometric Society.
  19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  20. Gertler, Mark, 1999. "Government debt and social security in a life-cycle economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 61-110, June.
  21. Christopher D Carroll, 1990. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," Economics Working Paper Archive 371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
  22. anonymous, 2001. "Monetary policy report to the Congress, February 17, 2001," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Mar, pages 103-131.
  23. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
  24. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  25. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  26. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
  27. Steven J. Davis & Felix Kubler & Paul S. Willen, 2005. "Borrowing costs and the demand for equity over the life cycle," Working Papers 05-7, Federal Reserve Bank of Boston.
  28. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
  29. 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.
  30. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
  31. Emilio Fernandez-Corugedo, 2002. "Soft liquidity constraints and precautionary saving," Bank of England working papers 158, Bank of England.
  32. Christopher D. Carroll & Wendy E. Dunn, 1997. "Unemployment Expectations, Jumping (S,s) Triggers, and Household Balance Sheets," NBER Working Papers 6081, National Bureau of Economic Research, Inc.
  33. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  34. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
  35. Simon Hall & Anne Vila Wetherilt, 2002. "The role of corporate balance sheets and bank lending policies in a financial accelerator framework," Bank of England working papers 166, Bank of England.
  36. repec:fth:harver:1435 is not listed on IDEAS
  37. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
  38. Bayoumi, Tamim A, 1993. "Financial Deregulation and Consumption in the United Kingdom," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 536-39, August.
  39. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  40. Kosuke Aoki & James Proudman & Gertjan Vlieghe, 2002. "Houses as collateral: has the link between house prices and consumption in the U.K. changed?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 163-177.
  41. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, July.
  42. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jfinin:v:13:y:2004:i:4:p:414-435. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.