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

52 Pages Posted: 8 May 2018 Last revised: 20 May 2018

See all articles by Jagjit S. Chadha

Jagjit S. Chadha

University of St. Andrews - School of Management

Germana Corrado

University of Rome, Tor Vergata - Department of Management and Law

Luisa Corrado

University of Rome Tor Vergata Department of Economics and Finance

Date Written: May 3, 2018

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 e¤ect 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 prices do not represent wealth, aggregate consumption is closely related to movements in house prices. House price-induced changes may lead to large variations in household spending via the collateral effect with important policy implications. We consider the case for jointly determined macro-prudential, fiscal and monetary policies in order to minimise losses for a representative household. We also analyse the implications when there is uncertainty over some of the policy parameters such as the loan default rate.

Keywords: Heterogeneous households, Credit constraints, Housing collateral, Asset prices, Bank lending, Macro-prudential tools, Fiscal and monetary policy

JEL Classification: E31, E40, E51

Suggested Citation

Chadha, Jagjit S. and Corrado, Germana and Corrado, Luisa, Consumption Dynamics, Housing Collateral and Stabilisation Policies: A Way Forward for Policy Co-Ordination? (May 3, 2018). CEIS Working Paper No. 433. Available at SSRN: https://ssrn.com/abstract=3172989 or http://dx.doi.org/10.2139/ssrn.3172989

Jagjit S. Chadha

University of St. Andrews - School of Management ( email )

The Gateway
Gateway
St. Andrews, Fife KY16 9SS
United Kingdom
+44 1334 462440 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages/j.chadha.shtml

Germana Corrado

University of Rome, Tor Vergata - Department of Management and Law ( email )

Rome
Italy

Luisa Corrado (Contact Author)

University of Rome Tor Vergata Department of Economics and Finance ( email )

Via Columbia n.2
Rome, rome 00100
Italy

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