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Consumption, Housing Collateral, and the Canadian Business Cycle

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  • Ian Christensen
  • Paul Corrigan
  • Caterina Mendicino
  • Shin-Ichi Nishiyama

Abstract

Using Bayesian methods, we estimate a small open economy model in which consumers face limits to credit determined by the value of their housing stock. The purpose of this paper is to quantify the role of collateralized household debt in the Canadian business cycle. Our findings show that the presence of borrowing constraints improves the performance of the model in terms of overall goodness of fit. In particular, the presence of housing collateral generates a positive correlation between consumption and house prices. Finally we find that housing collateral induced spillovers account for a large share of consumption growth during the housing market boom-bust cycle of the late 1980s.

Suggested Citation

  • Ian Christensen & Paul Corrigan & Caterina Mendicino & Shin-Ichi Nishiyama, 2009. "Consumption, Housing Collateral, and the Canadian Business Cycle," Staff Working Papers 09-26, Bank of Canada.
  • Handle: RePEc:bca:bocawp:09-26
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    More about this item

    Keywords

    Business fluctuations and cycles; Credit and credit aggregates; Transmission of monetary policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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