Consumption, housing collateral and the Canadian business cycle

Ian A. Christensen · Paul Corrigan · Caterina Mendicino · Shin‐Ichi Nishiyama

38 citations0/0 files storedCanadian Journal of Economics/Revue canadienne d économique

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Monetary Policy and Economic Impact Housing Market and Economics Economic theories and models

Abstract

Abstract How important are collateral constraints for reproducing salient features of the data? To address this question, we estimate two nested versions of a New Keynesian model: one with collateralized household debt and the frictionless version of the same model. Both versions of the model are fit to Canadian data using Bayesian methods. We argue that the presence of collateral constraints improves the performance of the model in terms of overall goodness of fit. Housing collateral helps to generate a positive correlation between consumption and house prices. Moreover, housing collateral induced spillovers boosted consumption growth during the housing market boom‐bust cycles of the late 1980s and early 2000s.

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References

1983Staggered prices in a utility-maximizing framework 2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 1997Credit Cycles 2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 1996Staggered Prices in a Utility-Maximizing Framework 1999Chapter 21 The financial accelerator in a quantitative business cycle framework 2003An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area 2005House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle

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