Tobin LIVES: Integrating Evolving Credit Market Architecture into Flow of Funds Based Macro-Models

35 Pages Posted: 12 Sep 2013

See all articles by John V. Duca

John V. Duca

Federal Reserve Banks - Federal Reserve Bank of Dallas; Oberlin College

John Muellbauer

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

Date Written: August 2013

Abstract

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 analyzing 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 endogenized 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’ (LIVES) approach. A byproduct is improved understanding of the secular decline in U.S. 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.

Keywords: finance and the real economy, financial crisis, consumption, credit constraints, household portfolios

JEL Classification: B22, E21, E44, E51, G11

Suggested Citation

Duca, John V. and Muellbauer, John, Tobin LIVES: Integrating Evolving Credit Market Architecture into Flow of Funds Based Macro-Models (August 2013). ECB Working Paper No. 1581, Available at SSRN: https://ssrn.com/abstract=2308923

John V. Duca (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Oberlin College

Oberlin, OH 44074
United States

John Muellbauer

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 278 583 (Phone)
+44 1865 278 557 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
49
Abstract Views
396
PlumX Metrics