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