House Prices, Heterogeneous Banks and Unconventional Monetary Policy Options
Bank regulators acknowledge that large U.S. commercial banks allocate considerably more resources to originating and trading off-balance sheet assets than their smaller counter parts. In this paper: (i) I show the asset concentration in these large banks moves closely with home prices due to the collateralized nature of off-balance sheet assets. (ii) I then develop a general equilibrium capable of capturing this asset redistribution between heterogeneous banks. When home prices fall, endogenously tightening leverage constraints force the big productive banks to unload real-estate secured debt to small unproductive banks. The redistribution to less productive banks sets off an asset price spiral in the model - amplifying typical downturns into deep recessions. The model has predictions for the joint behavior of finance premiums, output, home prices and the share of assets held by large banks. (iii) I use a VAR to confirm the model's predictions for these variables are consistent with the data. (iv) Finally, I use this empirically verified model to examine the effectiveness of unconventional monetary policyin mitigating a recession generated by a drop in housing demand. Despite the fact that both equity injections into "Too Big to Fail" banks and asset purchases by the Fed such as "QE 1/2/3" mitigate the crisis, the nuances of the policies are important. A prolonged asset purchase program is preferable to a short-term equity injection.
|Date of creation:||Nov 2013|
|Contact details of provider:|| Postal: 415 Snow Hall, Lawrence, KS 66045|
Phone: (785) 864-3501
Fax: (785) 864-5270
Web page: http://www2.ku.edu/~kuwpaper/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nicholas Oulton & Ana Rincon-Aznar, 2009.
"Rates of Return and Alternative Measures of Capital Input: 14 Countries and 10 Branches, 1971-2005,"
CEP Discussion Papers
dp0957, Centre for Economic Performance, LSE.
- Nicholas Oulton & Ana Rincon-Aznar, 2009. "Rates of return and alternative measures of capital input: 14 countries and 10 branches, 1971-2005," LSE Research Online Documents on Economics 28687, London School of Economics and Political Science, LSE Library.
- Ana Rincon-Aznar, 2009. "Rates of return and alternative measures of capital input: 14 countries and 10 branches, 1971-2005," NIESR Discussion Papers 347, National Institute of Economic and Social Research.
- Peter Breuer, 2000. "Measuring off-Balance-Sheet Leverage," IMF Working Papers 00/202, International Monetary Fund.
- Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
- Finn E. Kydland & Edward C. Prescott, 1982. "Executable program for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4, Quantitative Macroeconomics & Real Business Cycles.
- Finn E. Kydland & Edward C. Prescott, 1982. "Web interface for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4a, Quantitative Macroeconomics & Real Business Cycles.
- Carlstrom, Charles T. & Fuerst, Timothy S. & Ortiz, Alberto & Paustian, Matthias, 2014. "Estimating contract indexation in a Financial Accelerator Model," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 130-149.
- Charles T. Carlstrom & Timothy S. Fuerst & Alberto Ortiz & Matthias Paustian, 2013. "Estimating Contract Indexation in a Financial Accelerator Model," Documentos de Investigación - Research Papers 10, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
- Charles T. Carlstrom & Timothy S. Fuerst & Alberto Ortiz & Matthias Paustian, 2013. "Estimating contract indexation in a financial accelerator model," Working Paper 1216, Federal Reserve Bank of Cleveland, revised 01 Oct 2013.
- Yuriy Gorodnichenko, 2005. "Reduced-Rank Identification of Structural Shocks in VARs," Macroeconomics 0512011, EconWPA.
- Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-164, April.
- Matteo Iacoviello & Stefano Neri, 2007. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," Boston College Working Papers in Economics 659, Boston College Department of Economics, revised 23 Oct 2009.
- Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers: Evidence from an estimated DSGE model," Temi di discussione (Economic working papers) 659, Bank of Italy, Economic Research and International Relations Area.
- Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers : evidence from an estimated DSGE model," Working Paper Research 145, National Bank of Belgium.
- Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
- Michael D. Bauer & Glenn D. Rudebusch, 2014. "The Signaling Channel for Federal Reserve Bond Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 233-289, September.
- Michael D. Bauer & Glenn D. Rudebusch, 2011. "The signaling channel for Federal Reserve bond purchases," Working Paper Series 2011-21, Federal Reserve Bank of San Francisco.
- Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
- Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
- David C. Wheelock & Paul W. Wilson, 2012. "Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 171-199, 02. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:kan:wpaper:201311. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jianbo Zhang)
If references are entirely missing, you can add them using this form.