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Consumption Dynamics, Housing Collateral and Stabilisation Policies: A Way Forward for Policy Co-Ordination?

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  • Jagjit S Chadha

    ()

  • Germana Corrado

    ()

  • Luisa Corrado

    ()

Abstract

We decompose aggregate consumption of heterogeneous consumers by modelling both savers and their links to collateral constrained borrowers through a bank which prices credit risk. Savers own both firms and the commercial bank while borrowers require loans from the commercial bank to effect their consumption plans. The bank lends at a premium over the interest rate on central bank money in proportion to the riskiness of loans, the demand for loans, the asset price and the quantity of housing collateral. We show that even though house price do not represent wealth, aggregate consumption is closely related to movements in house prices. We consider the case for jointly determined macro-prudential, fiscal and monetary policies in order to minimise losses for a representative household. We consider the implications of loan default for our main results.

Suggested Citation

  • Jagjit S Chadha & Germana Corrado & Luisa Corrado, 2018. "Consumption Dynamics, Housing Collateral and Stabilisation Policies: A Way Forward for Policy Co-Ordination?," National Institute of Economic and Social Research (NIESR) Discussion Papers 486, National Institute of Economic and Social Research.
  • Handle: RePEc:nsr:niesrd:486
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    Cited by:

    1. Luca Onorante & Matija Lozej & Ansgar Rannenberg, 2017. "Countercyclical capital regulation in a small open economy DSGE model," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Data needs and Statistics compilation for macroprudential analysis, volume 46 Bank for International Settlements.

    More about this item

    Keywords

    Heterogeneous households; Credit constraints; Housing collateral; Asset prices; Bank lending; Macro-prudential tools; fiscal and monetary policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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