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How does Financial Vulnerability amplify Housing and Credit Shocks?

Cyril Couaillier and Valerio Scalone

Working papers from Banque de France

Abstract: In this paper we study how households’ financial vulnerability affects the propagation of housing and credit shocks. First, we estimate a non-linear model generating impulse responses that depend on the evolution of households' Debt to Service Ratio, i.e. the fraction of income that households use to pay back their debt. Second, we use sign restrictions to jointly identify a wide set of financial and economic shocks. We find that financial vulnerability: i) amplifies the response of the economy to housing shock, ii) makes the response to expansionary credit shocks less persistent and even negative after the first year since the arrival of the shock. Finally, overall recessionary shocks have larger effects with respect to expansionary ones of the same size.

Keywords: Financial Vulnerability; Macroprudential Policy; non-linear Models; Housing; Credit. (search for similar items in EconPapers)
JEL-codes: C32 E51 G01 G51 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2020
New Economics Papers: this item is included in nep-ban and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:763

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