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Consumption and housing wealth breakdown of the effect of a rise in interest rates

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  • Manuel Leon Navarro
  • Rafael Flores de Frutos

Abstract

In this article the effect on consumption of a fall in housing wealth and housing prices, resulting from an increase in interest rates is estimated. With the help of a dynamic multiequation, macroeconomic model, the consumer response function is broken down into two parts: a direct response related to a rise in the cost of credit and another indirect one related to the deterioration of the property market. Estimation of the theoretical model is done by means of a Vectorial Error-Correction (VEC) model.

Suggested Citation

  • Manuel Leon Navarro & Rafael Flores de Frutos, 2012. "Consumption and housing wealth breakdown of the effect of a rise in interest rates," Applied Economics, Taylor & Francis Journals, vol. 44(16), pages 2091-2110, June.
  • Handle: RePEc:taf:applec:44:y:2012:i:16:p:2091-2110
    DOI: 10.1080/00036846.2011.558484
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    File URL: http://hdl.handle.net/10.1080/00036846.2011.558484
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    References listed on IDEAS

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    1. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    2. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 29-35.
    3. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, January.
    4. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-193, January.
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    Cited by:

    1. Carolina Cosculluela-Mart, 2013. "Housing investment in Spain: has it been the main engine of growth?," Applied Economics, Taylor & Francis Journals, vol. 45(14), pages 1835-1843, May.

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