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Tobin lives: integrating evolving credit market architecture into flow of funds based macro-models

  • John Duca
  • John Muellbauer

After the global financial crisis, there is greater awareness of the need to understand the interactions between the financial sector and the real economy and hence the potential for financial instability. Data from the financial flow of funds, previously relatively neglected, are now seen as crucial to the data monitoring carried out by central banks. This paper revisits earlier efforts to understand financial-real linkages, such those of Tobin and the Yale School, and proposes a modeling framework for analysing the household flow of funds jointly with consumption. The consumption function incorporates household income, portfolios of assets and debt held at the end of the previous period, credit availability, and asset prices and interest rates. In a general equilibrium setting, these all have to be endogenised and since households make consumption and housing purchase decisions jointly with portfolio decisions, there is much to be gained in modeling a household sub-system of equations. Major evolutionary structural change – namely the evolving credit architecture facing households – is handled by our ‘Latent Interactive Variable Equation System’. A by-product is improved understanding of the secular decline in US saving rate, as well as of the household financial accelerator. Moreover, the models discussed in this paper offer new ways of interpreting data on credit, money and asset prices, which are crucial for central banks.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 1307.

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Date of creation: 2013
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Handle: RePEc:fip:feddwp:1307
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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  2. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
  3. Paul Bennett & Richard Peach & Stavros Peristiani, 1997. "Structural change in the mortgage market and the propensity to refinance," Research Paper 9736, Federal Reserve Bank of New York.
  4. Janine Aron & John Muellbauer & Anthony Murphy, 2010. "Credit, Housing Collateral and Consumption: Evidence from the UK, Japan and the US," Economics Series Working Papers 487, University of Oxford, Department of Economics.
  5. David Backus & Douglas D. Purvis, 1978. "An Integrated Model of Household Flow-of-Funds Allocations," Cowles Foundation Discussion Papers 493, Cowles Foundation for Research in Economics, Yale University.
  6. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
  7. Aron, Janine & Muellbauer, John, 2012. "Wealth, Credit Conditions and Consumption: Evidence from South Africa," CEPR Discussion Papers 8800, C.E.P.R. Discussion Papers.
  8. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  9. David Blake, 2004. "Modelling the composition of personal sector wealth in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 14(9), pages 611-630.
  10. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
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