Implications of household-level evidence for policy models: the case of macro-financial linkages

John Muellbauer

No 916, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Macroeconomic policy models should track the different channels of monetary transmission, providing a framework for Monetary Policy Committees. They should also be useful for assessing risks to financial stability, including for designing macroprudential stress tests and instrument settings in the new macroprudential toolkits. Current policy models, including the ‘semi-structural’ non-DSGE econometric models such as FRB-US, are seriously deficient in these respects, failing to capture the credit channel and the role of real estate in the financial accelerator that operated in the global financial crisis, and in key transmission channels in the recovery. Furthermore, developments in economic theory, greatly encouraged by new evidence, have rendered redundant the previously accepted micro-foundations for household behaviour in these policy models. A multi-purpose policy model needs to include a household-housing sub-system. This should contain a consumption function broadly consistent with the micro-evidence with equations for permanent income, for the balance sheet drivers, and for residential investment. To capture the credit channel, this block of the model needs to embed common credit conditions in the equations. Sub-system estimation is required to impose the cross-equation restrictions implied by these common factors.

Keywords: macroeconomic policy models; micro foundations; consumption; finance and the real economy; financial crisis; credit constraints; household portfolios; asset prices (search for similar items in EconPapers)
JEL-codes: E17 E21 E44 E51 E52 E58 G01 (search for similar items in EconPapers)
Date: 2020-08-26
New Economics Papers: this item is included in nep-cba and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://ora.ox.ac.uk/objects/uuid:ff1c5967-402a-45e8-92c4-36ad040626ab (text/html)

Related works:
Journal Article: Implications of household-level evidence for policy models: the case of macro-financial linkages (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:916

Access Statistics for this paper

More papers in Economics Series Working Papers from University of Oxford, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Anne Pouliquen ( this e-mail address is bad, please contact ).