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

40 Pages Posted: 19 May 2011

See all articles by John Muellbauer

John Muellbauer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

David Williams

University of Oxford - New College

Date Written: May 2011

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.

Keywords: Consumption, credit conditions, house prices, wealth

JEL Classification: E02, E21, E44, G21, R31

Suggested Citation

Muellbauer, John and Williams, David, Credit Conditions and the Real Economy: The Elephant in the Room (May 2011). CEPR Discussion Paper No. DP8386, Available at SSRN: https://ssrn.com/abstract=1846288

John Muellbauer (Contact Author)

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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David Williams

University of Oxford - New College ( email )

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Oxford OX1 3BN, Oxfordshire
United Kingdom

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