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Stabilisation Policy in a Model of Consumption, Housing Collateral and Bank Lending

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

Studies in Economics from School of Economics, University of Kent

Abstract: We decompose aggregate consumption 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 assets, 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 not independent of movements in house prices. We consider the case for employing macro-prudential policy jointly with monetary and fiscal policy in order to minimise losses for a representative household.

Keywords: Credit constrained households; housing collateral; asset prices; bank lending; default risk; macro-prudential; 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-mac, nep-mon and nep-ure
Date: 2013-09
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