The Impact of Credit for House Price Overvaluations in the Euro Area: Evidence from Threshold Models

30 Pages Posted: 22 Apr 2020

See all articles by Christian Dreger

Christian Dreger

European University Viadrina Frankfurt (Oder); IZA Institute of Labor Economics; Chinese Academy of Social Sciences (CASS)

Dieter Gerdesmeier

European Central Bank (ECB)

Barbara Roffia

European Central Bank (ECB)

Date Written: March 20, 2020

Abstract

The critical role of house prices for macroeconomic and financial stability is widely acknowledged since the global financial crisis. While house prices showed spectacular increases and even a bubble-like behaviour in the pre-crisis years, their fall thereafter was accompanied by deep recessions in many countries. Loose monetary conditions, such as the easy availability of credit, are often blamed to be fuelling such booms. In this paper, the link between credit and house prices is investigated for the euro area in a nonlinear model framework. This choice is motivated by the idea that the linkages between these two variables can be governed by a regime-switching behaviour. Threshold VAR (TVAR) models are estimated, which comprise real house price and credit developments, business and monetary conditions. Optimal breakpoints are determined via a grid search. The relationship between the variables is not stable. If output growth and interest rate changes serve as thresholds, two regimes can be distinguished. Conversely, if house prices and credit control the regime change, three regimes are more appropriate. Nonlinear impulse responses suggest that credit developments respond to house prices, while the reverse causality is less significant. Thus, the modest recovery of credit at the current edge can only be partially attributed to the recent acceleration of house prices in the euro area.

Keywords: Threshold models, house prices and credit, regime switching

JEL Classification: C34, E51, E52

Suggested Citation

Dreger, Christian and Gerdesmeier, Dieter and Roffia, Barbara, The Impact of Credit for House Price Overvaluations in the Euro Area: Evidence from Threshold Models (March 20, 2020). Available at SSRN: https://ssrn.com/abstract=3560049 or http://dx.doi.org/10.2139/ssrn.3560049

Christian Dreger (Contact Author)

European University Viadrina Frankfurt (Oder) ( email )

Frankfurt (Oder)
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Chinese Academy of Social Sciences (CASS) ( email )

Beijing, 100732
China

Dieter Gerdesmeier

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Barbara Roffia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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