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Credit conditions and the real economy: the elephant in the room

In: Property markets and financial stability

  • Veronica John Muellbauer

    (Oxford University)

  • Veronica David M Williams

    (Oxford University)

Changes in credit market architecture are an important but unobservable structural influence on economic activity. For Australian data, we model non-price credit supply conditions within equilibrium correction models of consumption, house prices, mortgage credit and housing equity withdrawal. Our "latent interactive variable equation system" (LIVES) employs a single latent variable to capture evolutionary shifts (in credit conditions) that affect not only the intercept of each equation, but also interact with key economic variables. We show that credit conditions impact on consumption by: (i) lowering the mortgage downpayment constraint facing young households; (ii) introducing a housing collateral channel from house prices to real activity; and (iii) facilitating intertemporal consumption smoothing.

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This chapter was published in:
  • Bank for International Settlements, 2012. "Property markets and financial stability," BIS Papers, Bank for International Settlements, number 64, June.
  • This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 95-101.
    Handle: RePEc:bis:bisbpc:95-101
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    22. Carl Schwartz & Christine Lewis & David Norman & Tim Hampton, 2008. "Factors Influencing Housing Equity Withdrawal: Evidence from a Microeconomic Survey," The Economic Record, The Economic Society of Australia, vol. 84(267), pages 421-433, December.
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