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Housing Market Dynamics and Macroprudential Policy

Author

Listed:
  • Gabriel Bruneau
  • Ian Christensen
  • Césaire Meh

Abstract

We perform an analysis to determine how well the introduction of a countercyclical loanto- value (LTV) ratio can reduce household indebtedness and housing price fluctuations compared with a monetary policy rule augmented with house price inflation. To this end, we construct a New Keynesian model in which a fraction of households borrow against the value of their houses and we introduce news shocks on housing demand. We estimate the model with Canadian data using Bayesian methods. We find that the introduction of news shocks can generate a housing market boom-bust cycle, the bust following unrealized expectations on housing demand. Our study also suggests that a countercyclical LTV ratio is a useful policy to reduce the spillover from the housing market to consumption, and to lean against news-driven boom-bust cycles in housing price and credit generated by expectations of future macroeconomic developments.

Suggested Citation

  • Gabriel Bruneau & Ian Christensen & Césaire Meh, 2016. "Housing Market Dynamics and Macroprudential Policy," Staff Working Papers 16-31, Bank of Canada.
  • Handle: RePEc:bca:bocawp:16-31
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    References listed on IDEAS

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    1. Robert J. Shiller, 2007. "Understanding recent trends in house prices and homeownership," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 89-123.
    2. José Dorich & Michael K. Johnston & Rhys R. Mendes & Stephen Murchison & Yang Zhang, 2013. "ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model," Technical Reports 100, Bank of Canada.
    3. Michał Brzoza-Brzezina & Paolo Gelain & Marcin Kolasa, 2014. "Monetary and macroprudential policy with multiperiod loans," NBP Working Papers 192, Narodowy Bank Polski, Economic Research Department.
    4. Birol Kanik & Wei Xiao, 2014. "News, Housing Boom-Bust Cycles, and Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 10(4), pages 249-298, December.
    5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    6. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1183-1216, September.
    7. Ian Christensen & Paul Corrigan & Caterina Mendicino & Shin-Ichi Nishiyama, 2016. "Consumption, housing collateral and the Canadian business cycle," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 207-236, February.
    8. Kannan Prakash & Rabanal Pau & Scott Alasdair M., 2012. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-44, June.
    9. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
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    Cited by:

    1. repec:eee:ecmode:v:77:y:2019:i:c:p:234-252 is not listed on IDEAS
    2. Bluwstein, Kristina, 2017. "Asymmetric Macro-Financial Spillovers," Working Paper Series 337, Sveriges Riksbank (Central Bank of Sweden).
    3. Turdaliev, Nurlan & Zhang, Yahong, 2019. "Household debt, macroprudential rules, and monetary policy," Economic Modelling, Elsevier, vol. 77(C), pages 234-252.
    4. Maria Chiara Cavalleri & Boris Cournède & Volker Ziemann, 2019. "Housing markets and macroeconomic risks," OECD Economics Department Working Papers 1555, OECD Publishing.
    5. William Gatt, 2018. "Housing boom-bust cycles and asymmetric macroprudential policy," CBM Working Papers WP/02/2018, Central Bank of Malta.
    6. Oleksiy Kryvtsov & Miguel Molico & Ben Tomlin, 2015. "On the Nexus of Monetary Policy and Financial Stability: Recent Developments and Research," Discussion Papers 15-7, Bank of Canada.

    More about this item

    Keywords

    Business fluctuations and cycles; Financial stability; Housing; Monetary policy framework; Transmission of monetary policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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