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

Jagjit Chadha (), Germana Corrado () and Luisa Corrado ()

No 486, National Institute of Economic and Social Research (NIESR) Discussion Papers from National Institute of Economic and Social Research

Abstract: 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.

Keywords: Heterogeneous households; Credit constraints; Housing collateral; Asset prices; Bank lending; Macro-prudential tools; fiscal and monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E40 E51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2018-02
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