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Consumption, Housing Collateral, and the Canadian Business Cycle

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

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.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp09-26.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 09-26.

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Length: 49 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:bca:bocawp:09-26
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