How Does Financial Vulnerability Amplify Housing and Credit Shocks?

Abstract

Households’ financial vulnerability substantially affects the propagation of financial shocks. Whether those shocks originate in the housing sector or in the credit sector is key to determine their state effect. Through the lens of an empirical non-linear macroeconomic model, we study how the impulse responses of housing and credit shocks vary according to the evolution households’ debt burden. Under high vulnerability, only housing shocks are amplified and their state effect is in line with economic theory. Conversely, expansionary credit supply shocks have more effect when vulnerability is low, whereas their effect turns strongly recessionary when vulnerability is high.

Keywords: Financial Vulnerability, Macroprudential Policy, non-linear Models, Housing, Credit

JEL Classification: C32; E51; G01; G51