The Financial Accelerator: Evidence from International Housing Markets

32 Pages Posted: 18 Mar 2006

See all articles by Heitor Almeida

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Crocker H. Liu

Arizona State University

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Date Written: October 18, 2005

Abstract

This paper shows novel evidence on the mechanism through which financial constraints amplify fluctuations in asset prices and credit. It does so using contractual features of housing finance. Among agents whose housing demand is constrained by the availability of collateral, those who can borrow against a larger fraction of their housing value (achieve a higher loan-to-value, or LTV, ratio) have more procyclical debt capacity. This procyclicality underlies the financial accelerator mechanism described by Stein (1995) and Bernanke et al. (1996). Our study uses international variation in maximum LTV ratios over three decades to test whether (a) housing prices and (b) demand for new mortgage borrowings are more sensitive to income shocks in countries where households can achieve higher LTV ratios. The results we obtain are consistent with the dynamics of a collateral-based financial accelerator in housing markets.

Keywords: financial accelerator, housing prices, collateral constraint, income constraint, credit multiplier

JEL Classification: E44, E32, G15, G21, R21, R31

Suggested Citation

Almeida, Heitor and Liu, Crocker H. and Campello, Murillo, The Financial Accelerator: Evidence from International Housing Markets (October 18, 2005). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=348740 or http://dx.doi.org/10.2139/ssrn.348740

Heitor Almeida (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Crocker H. Liu

Arizona State University ( email )

W.P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-3259 (Phone)
480-965-8539 (Fax)

HOME PAGE: http://www.public.asu.edu/~chliu1

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Register to save articles to
your library

Register

Paper statistics

Downloads
821
Abstract Views
5,651
rank
28,351
PlumX Metrics