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Credit Conditions and the Real Economy: The Elephant in the Room

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  • Muellbauer, John
  • Williams, David M

Abstract

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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  • Muellbauer, John & Williams, David M, 2011. "Credit Conditions and the Real Economy: The Elephant in the Room," CEPR Discussion Papers 8386, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8386
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    Cited by:

    1. Walentin, Karl, 2014. "Business cycle implications of mortgage spreads," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 62-77.
    2. Kieran McQuinn & Teresa Monteiro & Conor O’Toole, 2021. "House Price Expectations, Labour Market Developments and the House Price to Rent Ratio: A User Cost of Capital Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 62(1), pages 25-47, January.
    3. Veronica John Muellbauer & Veronica David M Williams, 2012. "Credit conditions and the real economy: the elephant in the room," BIS Papers chapters, in: Bank for International Settlements (ed.), Property markets and financial stability, volume 64, pages 95-101, Bank for International Settlements.
    4. Ronan C. Lyons, 2015. "East, west, boom and bust: the spread of house prices and rents in Ireland, 2007-2012," Journal of Property Research, Taylor & Francis Journals, vol. 32(1), pages 77-101, March.
    5. Alexander Ballantyne & Tom Cusbert & Richard Evans & Rochelle Guttmann & Jonathan Hambur & Adam Hamilton & Elizabeth Kendall & Rachael McCririck & Gabriela Nodari & Daniel M. Rees, 2020. "MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 96(314), pages 225-251, September.
    6. John Muellbauer, 2012. "When is a Housing Market Overheated Enough to Threaten Stability?," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Frank Packer & Callan Windsor (ed.),Property Markets and Financial Stability, Reserve Bank of Australia.
    7. McCarthy, Yvonne & McQuinn, Kieran, 2017. "Credit conditions in a boom and bust property market: Insights for macro-prudential policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 171-182.
    8. Muellbauer, John & Geiger, Felix & Rupprecht, Manuel, 2016. "The housing market, household portfolios and the German consumer," Working Paper Series 1904, European Central Bank.
    9. Darja Reuschke & Duncan Maclennan, 2014. "Housing Assets and Small Business Investment: Exploring Links for Theory and Policy," Regional Studies, Taylor & Francis Journals, vol. 48(4), pages 744-757, April.
    10. John Muellbauer & Pierre St-Amant & David Williams, 2015. "Credit Conditions and Consumption, House Prices and Debt: What Makes Canada Different?," Staff Working Papers 15-40, Bank of Canada.
    11. John Muellbauer, 2015. "Housing and the Macroeconomy: Inflation and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 51-58, March.
    12. Janine Aron & John Muellbauer, 2013. "Wealth, Credit Conditions, and Consumption: Evidence from South Africa," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 59, pages 161-196, October.
    13. Martin Wong, 2017. "Revisiting the Wealth Effect on Consumption in New Zealand," Reserve Bank of New Zealand Analytical Notes series AN2017/03, Reserve Bank of New Zealand.

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    More about this item

    Keywords

    Consumption; Credit conditions; House prices; Wealth;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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