Asset Price Shocks, Real Expenditures, and Financial Structure: A Multi-Country Analysis

35 Pages Posted: 8 Jul 2008 Last revised: 9 May 2013

See all articles by Robert S. Chirinko

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute)

Leo de Haan

De Nederlandsche Bank

Elmer Sterken

University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 3, 2008

Abstract

This paper examines the responses of private consumption, residential investment, and business investment in 11 EU countries, Japan, and the United States to shocks in housing and equity prices. The effects are assessed with a Structural Vector Auto Regressive (SVAR) model, and four key findings emerge. First, the impacts of asset price shocks are heterogeneous across countries. Second, these heterogeneous responses are systematically related to cross-country variation in financial structure. We are thus able to document the importance of a wealth/balance sheet channel for private consumption and residential investment and an equity finance channel for business investment. Third, for a given country, housing shocks have a much greater impact than equity shocks. Fourth, variance decompositions indicate that monetary policy reacts to equity price shocks but not to housing price shocks. These results highlight the important role played by asset prices on real activity and fuel the debate about the inclusion of asset prices in the formulation of monetary policy.

Keywords: monetary policy, asset prices, structural VAR

JEL Classification: E44, E52, E2

Suggested Citation

Chirinko, Robert S. and de Haan, Leo and Sterken, Elmer, Asset Price Shocks, Real Expenditures, and Financial Structure: A Multi-Country Analysis (July 3, 2008). CESifo Working Paper Series No. 2342; UIC College of Business Administration Research Paper No. 08-10. Available at SSRN: https://ssrn.com/abstract=1156753

Robert S. Chirinko (Contact Author)

University of Illinois at Chicago, Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~chirinko/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Leo de Haan

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands
+31 20 5243539 (Phone)
+31 20 5242514 (Fax)

Elmer Sterken

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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