Stanimira Milcheva and Steffen Sebastian
University of Regensburg
Housing Channels of Monetary Policy Transmission
in European Industrial and Transition Countries
Motivation
What is the role of the housing market in the monetary policy transmission to consumption and residential investment?
Hypothesis: Housing markets play an important role for the transmission of monetary shocks to consumption and investment in countries with flexible and well developed mortgage markets.
Milcheva • Housing Channels of Monetary Policy Transmission
Housing Channels of Monetary Policy Transmission
Credit channel
Interest rate
channel
Monetary policy shock
Cost of
capital
effect
Tobin‘s
Q effect
Interest
rate
income
effect
Rents and
savings
effect
Housing
wealth
effect
Collateral
effect
Residential investment Consumption
House Prices
Milcheva • Housing Channels of Monetary Policy Transmission
Institutional factors
Country Mortgage Mortgage Average Total outst. Prevailing Mortgage Refinancing market debt outst. typical securitization type of equity (fee-free
index of (from MFIs) LTV ratio from resid. mortgage withdraw prepayment) completeness to GDP lending rate (MEW) Year 2008 2008 2008 2007 2003-2007 Austria 31% 25.3% 84% - variable no noBelgium 34% 39.8% 80% 80,0% fixed (>10y) no noDenmark 82% 95.3% 80% 80,0% fixed yes yesFinland 49% 47.5% 70% 70,0% variable yes yesFrance 23% 35.9% 91% 91,0% fixed (>10y) no noGermany 28% 46.1% 72% 72,0% fixed (>5y) no noGreece 35% 32.0% 58% 58,0% variable no noIreland 39% 80.0% 83% 83,0% variable limited yesItaly 26% 19.8% 65% 65,0% variable no noNetherlands 71% 99.1% 100% 100,0% fixed (>5y) yes noNorway 59% 53.3% 70% 70,0% variable yes noPortugal - 63.3% 56% 56,0% variable - noSpain 40% 62.0% 61% 61,0% variable limited noSweden 66% 60.6% 80% 80,0% fixed (>1y) yes yesUK 58% 80.5% 77% 77,0% variable yes limitedUS 98% 77,0% 75% 75,0% initial fixed yes yesBulgaria - 11.6% 80%-90% 0% variable - -
Czech Republic - 10.8% 56% 56% - - -Estonia - 39.2% 100% 0% initial fixed - -
Hungary - 14.0% 61% 48% fixed until 2005 - -Lithuania - 17.3% 75% 0% variable - -Poland - 15.6% 90% 1% variable - -
Slovenia - 9.1% 61% 0% variable - -
Milcheva • Housing Channels of Monetary Policy Transmission
Methodology
• Estimation of vector autoregression (VAR) models for 21 European countries and the US.
• Counterfactual simulation of impulse responses. (see Bernanke et al. (1997))
Milcheva • Housing Channels of Monetary Policy Transmission
Existing Literature
Ludvigson et al. (2002): SVAR with total wealth, counterfactual simulation, US, 1966:1 – 2000:3, insignificant effect of the wealth channel on consumption in the US.
Giuliodori (2005): VAR with house prices, counterfactual simulation, 9 European industrial countries, 1979:3 – 1998:4, house prices play an important role for the transmission of monetary policy shocks to GDP in countries with well developed housing markets, such as Sweden, Spain, the Netherlands.
Elbourne (2008): SVAR with house prices, counterfactual simulation, UK, 1987:M1 – 2003:M5, house prices play a small role in the monetary policy transmission mechanism.
Milcheva • Housing Channels of Monetary Policy Transmission
Contribution
• A more in-depth study of the monetary policy transmission through housing
• Broader sample of countries, including Central and Eastern European (CEE) countries
• Same model applied to all countries
• Accounting for structural breaks
• Time period after the liberalisation of the mortgage markets
• Specifying the role of each housing channel on consumption and investment
• Accounting for significance of simulated impulse responses
Milcheva • Housing Channels of Monetary Policy Transmission
Data
Countries
• Industrial countries: AU, BE, DK, DE, GR, FI, FR, IR, IT, NL, NO, ES, SE, UK, US
• CEE countries: BG, CZ, EE, HU, LT, PL, SI
Estimation period From mid-1990s to 2008 (quarterly)
Variables consumer price indexhousehold consumption gross fixed capital formation in housing house price indexmoney market rate
Milcheva • Housing Channels of Monetary Policy Transmission
Results: Shock in IR HP
Milcheva • Housing Channels of Monetary Policy Transmission
Results: Shock in IR HP
Milcheva • Housing Channels of Monetary Policy Transmission
Countries with significant housing wealth/collateral effects
Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response.
Milcheva • Housing Channels of Monetary Policy Transmission
Countries with significant housing wealth/collateral effects
Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response, blue line: simulated respinse when GFCF=0 in consumotion equation.
Milcheva • Housing Channels of Monetary Policy Transmission
Results: Shock in HP GFCF
Milcheva • Housing Channels of Monetary Policy Transmission
Countries with significant Tobin‘s Q effects
Dark blue line: estimated impulse response, red line: simulated impulse response of consumotion to an interest rate shock.
Milcheva • Housing Channels of Monetary Policy Transmission
Milcheva • Housing Channels of Monetary Policy Transmission
Thank you!
Milcheva • Housing Channels of Monetary Policy Transmission
Milcheva • Housing Channels of Monetary Policy Transmission