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

| Publication date: 1 Feb 2018 | Theme: Macroeconomics | NIESR Author(s): JChadha | External Author(s): Corrado, G, Corrado, L | JEL Classification: E31, E40, E51 | NIESR Discussion Paper Number: 486

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 effect 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 price do not represent wealth, aggregate consumption is closely related to movements in house prices. We consider the case for jointly determined macro-prudential, fiscal and monetary policies in order to minimise losses for a representative household. We consider the implications of loan default for our main results.

Keyword tags: 
Heterogeneous households
Credit constraints
Housing collateral
Asset prices
Bank lending
Macro-prudential tools
fiscal and monetary policy
Publication type: 

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