Post on 24-Mar-2018
transcript
Leaning Against the Credit Cycle1
Paolo Gelain1,2 Kevin Lansing3 Gisle Natvik4,1
1Norges Bank
2European Central Bank
3Federal Reserve Bank of San Francisco
4BI Norwegian Business School
Refit workshopNorges Bank
April 2017
1Any views expressed here are those of the authors, and not those of NorgesBank, the European Central Bank or the Federal Reserve Bank of SanFrancisco.
Introduction
I Recent monetary policy debate: Emphasis on debt
I Credit typically moves gradually and persistently over time
I The “Credit cycle” (Drehman, Borio, Tsatsaronis, 2012, etc)
I Schularik and Taylor (2012): Debt matters for the risk andcost of crises
I “... policymakers ignore credit at their peril”
I Mason and Jayadev (2014): Household leverage largely drivenby income growth, inflation and interest rates rather than newborrowing.
I Svensson (2013): Interest rate hikes likely to raisedebt-to-GDP
I Do not address a high debt-to-GDP ratio with interest ratehikes
Introduction
I Recent monetary policy debate: Emphasis on debtI Credit typically moves gradually and persistently over time
I The “Credit cycle” (Drehman, Borio, Tsatsaronis, 2012, etc)
I Schularik and Taylor (2012): Debt matters for the risk andcost of crises
I “... policymakers ignore credit at their peril”
I Mason and Jayadev (2014): Household leverage largely drivenby income growth, inflation and interest rates rather than newborrowing.
I Svensson (2013): Interest rate hikes likely to raisedebt-to-GDP
I Do not address a high debt-to-GDP ratio with interest ratehikes
I Problem: Standard DSGE models used for monetary policyanalysis do not account well for debt dynamics
I Key assumption: All debt fully amortized each period.
Mortgage Debt Dynamics – Data vs Standard Model
I Problem: Standard DSGE models used for monetary policyanalysis do not account well for debt dynamics
I Key assumption: All debt fully amortized each period.
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010−0.2
−0.15
−0.1
−0.05
0
0.05
0.1
0.15
0.2
0.25
Debt−to−GDP, U.S. DATADebt−to−GDP, 1 quarter
Our Paper
I Monetary policy in a simple New Keynesian model with longterm debt
I Collateral constraint (Iaccoviello, 2005)I Long term debt – only new loans constrained
I Q1: What is the likely effect of an interest rate hike on theaggregate debt burden?
I Q2: What are the consequences of mechanically raising theinterest rate in response to debt?
I Q3: What characterizes Debt-to-GDP targeting vs. Inflationtargeting?
I Estimate a medium scale DSGE model
I Is long-term debt quantitatively relevant?I Do the answers to Q1-Q3 hold within richer, estimated model
and more shocks?
Our Paper
I Monetary policy in a simple New Keynesian model with longterm debt
I Q1: What is the likely effect of an interest rate hike on theaggregate debt burden?
I Small, persistent, possibly positive in the short run.
I Q2: What are the consequences of mechanically raising theinterest rate in response to debt?
I Q3: What characterizes Debt-to-GDP targeting vs. Inflationtargeting?
I Estimate a medium scale DSGE model
I Is long-term debt quantitatively relevant?I Do the answers to Q1-Q3 hold within richer, estimated model
and more shocks?
Our Paper
I Monetary policy in a simple New Keynesian model with longterm debt
I Q1: What is the likely effect of an interest rate hike on theaggregate debt burden?
I Q2: What are the consequences of mechanically raising theinterest rate in response to debt?
I IndeterminacyI Debt-to-GDP stabilized only by a negative debt-to-GDP
response
I Q3: What characterizes Debt-to-GDP targeting vs. Inflationtargeting?
I Estimate a medium scale DSGE model
I Is long-term debt quantitatively relevant?I Do the answers to Q1-Q3 hold within richer, estimated model
and more shocks?
Our Paper
I Monetary policy in a simple New Keynesian model with longterm debt
I Q1: What is the likely effect of an interest rate hike on theaggregate debt burden?
I Q2: What are the consequences of mechanically raising theinterest rate in response to debt?
I Q3: What characterizes Debt-to-GDP targeting vs. Inflationtargeting?
I Whenever inflation targeting implies a debt-to-GDP increase,debt-to-GDP stabilization implies a more expansionary policy
I Estimate a medium scale DSGE model
I Is long-term debt quantitatively relevant?I Do the answers to Q1-Q3 hold within richer, estimated model
and more shocks?
Our Paper
I Monetary policy in a simple New Keynesian model with longterm debt
I Q1: What is the likely effect of an interest rate hike on theaggregate debt burden?
I Q2: What are the consequences of mechanically raising theinterest rate in response to debt?
I Q3: What characterizes Debt-to-GDP targeting vs. Inflationtargeting?
I Estimate a medium scale DSGE model
I Is long-term debt quantitatively relevant?
I Correlation patterns in model closer to empirical (US)counterparts
I Do the answers to Q1-Q3 hold within richer, estimated modeland more shocks?
Our Paper
I Monetary policy in a simple New Keynesian model with longterm debt
I Q1: What is the likely effect of an interest rate hike on theaggregate debt burden?
I Q2: What are the consequences of mechanically raising theinterest rate in response to debt?
I Q3: What characterizes Debt-to-GDP targeting vs. Inflationtargeting?
I Estimate a medium scale DSGE model
I Is long-term debt quantitatively relevant?I Do the answers to Q1-Q3 hold within richer, estimated model
and more shocks?
I Yes.
Our Paper
I Key mechanism: “Fisher dynamics”
Related Literature
I ”Credit cycle”: Drehman et al. (2012), Aikman et al. (2013),Strohsal et al. (2015), Runstler and Vlekke (2015), Iacoviello(2015), Galati et al. (2016)
I Monetary policy and debt-to-GDP: Svensson (2013), Laseenand Strid (2013), Robstad (2014), Alpanda and Zubairy(2016), Bauer and Granziera (2016)
I Multiperiod debt: Campbell and Hercowitz (2004), Rubio(2011), Kydland et al. (2012), Justiniano et al. (2013),Garriga et al. (2013), Calza et al. (2013), Chen et al. (2013),Andrees et al. (2014), Guerrieri and Iacoviello (2015)
I Debt and inflation: Mason and Jayadev (2014), Gomes et al.(2014)
Simple NK Model with Housing and Long-Term Debt
I Two household types: Savers (patient) and Borrowers(impatient)
I Borrowing subject to collateral constraint on new loans onlyI Reduced form law of motion for amortization as in Kydland,
Rupert and Sustek (2013)
I Firms owned by Savers
I Central bank
I Fixed supply of houses
I Calvo pricing, price indexation and consumption habits
Household Problem
Maximize
E0
∞∑t=0
βtUt (ct, ht, Lt) ,
subject to budget and borrowing constraints:
cb,t + qt(hb,t − hb,t−1) +1 + rt−1πt
bb,t−1 = wb,tLb,t + bb,t,
bb,t = ϑmEt (qt+1πt+1)hb,t
1 + rt+ (1− ϑ) (1− δt−1)
bb,t−1πt
.
I ϑ = refinancing share
I δt amortization share
Amortization Process
δt =
(1− lt
bt
)δαt−1 +
ltbt
(1− α)κ ,
where
lb,t = bb,t − (1− δt−1)bb,t−1πt
I α ∈ [0, 1) and κ > 0 are parameters and
I lt/bt+1 is the share of new annuity loans in the end-of-periodoutstanding stock of debt.
Debt Contract
0 50 1000
5000
10000A. QUARTERLY PAYMENTS
0 50 1000
0.5
1
1.5
2
2.5x 10
5 B. BALANCE
0 50 100 1500
50
100C. COMPOSITION OF PAYMENTS
0 50 100 150−10
−5
0
5x 10
−4D. APPROXIMATION ERROR
Calibration
I Steady state targetsI Share of liquidity constrained, relative hours worked and
relative labor incomes in Justiniano, Primiceri and Tambalotti(2013)
I Ratio of housing wealth to yearly consumption in Iaccovielloand Neri (2010)
I Approximate 30-year annuity loan contract, as in Kydland,Rupert, Sustek (2013)
I Household debt-to-housing value equal to 0.5
Calibration
I Steady state targetsI Share of liquidity constrained, relative hours worked and
relative labor incomes in Justiniano, Primiceri and Tambalotti(2013) (n, νl,l, νl,b, $)
I Ratio of housing wealth to yearly consumption in Iaccovielloand Neri (2010) (νh)
I Approximate 30-year annuity loan contract, as in Kydland,Rupert, Sustek (2013) (κ, α)
I Household debt-to-housing value equal to 0.5 (ϑ)
Table: Parameter Values
βl 0.99 ϕ 1 ε 6 m 0.8βb 0.97 ε 0.5 θ 0.75 ρz 0.9νh 0.075 n 0.61 ι 0.5 ϑ 0.031νl,l 0.10 $ 0.5 κ 1.013 φπ 1.5νl,b 0.23 ξ 0.33 α 0.996 φr 0.75
Monetary Policy Shock
10 20 30−0.2
−0.1
0
0.1
0.2Interest Rate
10 20 30−0.2
−0.1
0
0.1
0.2Inflation
10 20 30−0.2
−0.1
0
0.1
0.2GDP
10 20 30−0.6
−0.3
0
0.3
0.6House Prices
10 20 30−3
−2
−1
0
1
2Household Debt
10 20 30−3
−2
−1
0
1
2New Loans
10 20 30−3
−2
−1
0
1
2Debt/GDP
10 20 30−1
−0.5
0
0.5
1Amortization
1q−Debt 30y−Debt
Slow-Moving Debt Burden and Variable vs ConstantAmortization Rate
20 40 60 80 100 120−0.4
−0.2
0
0.2
0.4Household Debt
20 40 60 80 100 120−0.4
−0.2
0
0.2
0.4Debt/GDP
20 40 60 80 100 120−3
−2
−1
0
1New Loans
20 40 60 80 100 120−0.1
0
0.2
0.4
0.6Amortization Rate
30y Fixed Amortization 30y Annuity Loan
Policy Implication?
I If we accept that tighter monetary policy raises the debtburden:
I What is the implication for systematic monetary policy?
I First approach: What are the consequences of letting theinterest rate systematically respond to debt-to-GDP?
I Simple policy rule
Rt = (1 + r) πφπt
(btyt
)φb/y
Determinacy Analysis – Reacting to Debt-to-GDP
0 0.2 0.4 0.6 0.8 10.94
0.96
0.98
1
1.02
φb/y
φ π
Determinacy
Indeterminacy
1q−debt
0 0.2 0.4 0.6 0.8 1
12
4
6
8
10
Determinacy
Indeterminacy
φb/y
φ π
10y−debt
0 0.2 0.4 0.6 0.8 1
1
4
8
12
16
Determinacy
Indeterminacy
φb/y
φ π
20y−debt
0 0.2 0.4 0.6 0.8 11
6
12
18
24
Determinacy
Indeterminacy
φb/y
φ π
30y−debt
Determinacy Analysis – Reacting to the Real Debt Level
0 0.5 10.92
0.94
0.96
0.98
1
φb
φ π
Determinacy
Indeterminacy
1q−debt
0 0.5 1
12
4
6
8
10
Determinacy
Indeterminacy
φb
φ π
10y−debt
0 0.5 114
8
12
16
Determinacy
Indeterminacy
φb
φ π
20y−debt
0 0.5 11
6
12
18
24
φb
φ π
Determinacy
Indeterminacy
30y−debt
Determinacy Analysis. Intuition
1q-debt:
I An increase in inflation expectations unjustified byfundamentals causes:⇒ lower real interest rate
⇒ relaxation of the collateral constraint⇒ increased debt
I Response to debt implies stronger response to inflationarypressure
Determinacy Analysis. Intuition
30y-debt:
I An increase in inflation expectations unjustified byfundamentals causes:⇒ lower real interest rate
⇒ relaxation of the collateral constraint⇒ increased uptake of new loans
... but pre-existing debt is unaffected
⇒ total stock of real debt (-to-GDP) falls due to highercurrent inflation
I Response to debt implies weaker response to inflationarypressure
Debt and Inflation Volatility under Simple Policy Rules
0 0.5 1 1.5 20
0.05
0.1
0.15
0.2
φb/y
Std
(b/y
)1q−Debt
0 0.5 1 1.5 20
0.02
0.04
0.06
0.08
0.1
φb/y
Std
(π)
−2 −1.5 −1 −0.5 00
0.05
0.1
0.15
0.2
φb/y
30y−Debt
−2 −1.5 −1 −0.5 00
0.002
0.004
0.006
0.008
0.01
φb/y
Targeting Frontiers
An Estimated Medium Scale DSGE Model
I Do the above findings generalize?
An Estimated Medium Scale DSGE Model
I Richer model of housing and the macro economy: Iacovielloand Neri (2010)
I Housing construction sector, adjustment costs, etc.
I Model evaluation: Estimation, likelihood comparison, keymoments in data vs. model, narrative of 2000s’ boom-bustepisode
I Household debt as observable (unlike Iacoviello and Neri, 2010)
I More shocks (10)
I Upshot of estimation:
I Estimated debt duration: 73 quartersI AR-coefficient on ltv-shocks drops from 0.98 to 0.73I 1q model: log data density of 6128I 73q model: log data density of 6418 (“Decisive evidence”,
Kass and Raftery, 1995)
Estimates Housing and LTV Shocks
Model Evaluation
k1 2 3 4 5
Real debt
auto
corr
ela
tion
0.6
0.8
11q Debt
Data5th - 95thMedian
k1 2 3 4 5
0.6
0.8
173q Debt
Data5th - 95thMedian
k-5 0 5D
ebt-
House p
rices
corr
ela
tion
-0.5
0
0.5
1
k-5 0 5
-0.5
0
0.5
1
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
% d
evia
tion fro
mste
ady s
tate
-40
-20
0
20
Lending Standard Shock
1-quarter debt model 73-quarter debt model
Monetary Policy Shock - Estimated Model
0 10 20 30
0
0.05
0.1
0.15
0.2Interest Rate
1q Debt 73q Debt
0 10 20 30
-0.06
-0.04
-0.02
0
Inflation
0 10 20 30
-0.8
-0.6
-0.4
-0.2
0GDP
0 10 20 30
-0.6
-0.4
-0.2
0
House Prices
0 10 20 30
-1.5
-1
-0.5
0
Real Debt
0 10 20 30
-1
-0.5
0
0.5
Debt/GDP
Debt and Inflation Volatility under Simple Policy Rules -Estimated Model
φb/y
-2 -1 00
0.1
0.2
0.3Std(b/y)
φy=0.52
φy=3
φb/y
-2 -1 00
0.01
0.02
0.03
0.04Std(π)
φ∆b
-2 0 2 40
0.1
0.2
0.3Std(b/y)
φ∆b
-2 0 2 40
0.01
0.02
0.03
0.04Std(π)
φE(b/y)
-2 -1 00
0.1
0.2
0.3Std(b/y)
1y forecast2y forecast
φE(b/y)
-2 -1 00
0.01
0.02
0.03
0.04Std(π)
φl
0 1 20
0.1
0.2
0.3Std(b/y)
φl
0 1 20
0.01
0.02
0.03
0.04Std(π)
Debt-to-GDP vs. Inflation Targeting - Estimated Model
10 20 30−2
−1
0
1
2
Nonhousing ProductivityShock
De
bt/
GD
P
10 20 30−0.15
−0.1
−0.05
0
0.05
Infla
tion
10 20 300
0.5
1
1.5
GD
P
10 20 30−0.8−0.6−0.4−0.2
00.2
Intertemp PreferenceShock
10 20 30−0.05
0
0.05
0.1
10 20 30−0.2
−0.1
0
0.1
0.2
10 20 30−0.5
0
0.5
1
1.5
Housing PreferenceShock
10 20 30−0.05
0
0.05
0.1
10 20 30−0.04
−0.02
0
0.02
0.04
10 20 30−1
0
1
2
3
Lending StandardsShock
10 20 30−0.2
0
0.2
0.4
Γ=0 Γ=1 Estimated Rule
10 20 30−0.5
0
0.5
1
1.5
Debt-to-GDP vs. Inflation Targeting - Estimated Model
10 20 30−0.5
−0.25
0
0.25
Housing ProductivityShock
De
bt/G
DP
10 20 30−0.05
−0.025
0
0.025
Infla
tion
10 20 30−0.05
−0.025
0
0.025
GD
P
10 20 30−0.4
−0.2
0
0.2
Investment SpecificShock
10 20 30−0.05
−0.025
0
0.025
0.05
10 20 300
0.1
0.2
0.3
10 20 30−0.5
0
0.5
1Labor Supply Shock
10 20 30−0.05
0
0.05
0.1
0.15
10 20 30−1
−0.5
0
0.5
10 20 30−20
0
20Cost Shock
10 20 30−0.1
0
0.1
0.2
0.3
Γ=0 Γ=1 Estimated Rule
10 20 30−10
−5
0
5
Conclusion
I A tractable model with gradual amortization process capturespersistent nature of debt dynamics a la “credit cycle”
I Captures the low contemporary correlation and the lead-lagrelationship between debt-to-GDP and house prices
I Policy tightening has minor, but persistent, effect on debt
I Might even raise households’ debt-to-GDP in the short run(consistent with Svensson, 2013, Granziera and Bauer, 2016,Robstad, 2015)
I Mechanically increasing the interest rate in response to thedebt-to-GDP level causes equilibrium indeterminacy
I Opposite under 1-quarter-debtI Destabilizes debt itselfI Responding negatively to debt-to-GDP stabilizes debt
Conclusion
I Debt-to-GDP targeting implies more contractionary policythan inflation targeting, when the latter makes debt-to-GDPdecrease.
I Debt-to-GDP targeting implies more expansionary policy thaninflation targeting, when the latter makes debt-to-GDPincrease.
⇒ “Fisher Dynamics” are key to how monetary policy should dealwith high indebtedness.
Debt-to-GDP vs. Inflation Targeting
Set it so as to minimize:
∑∞j=0 β
jl
[(1− Γ)
((1− λy)π2t+j + λy
(yt+j
yft+j
)2)
+ Γ(bb,t+j/yt+j
bb/y
)2]
Debt-to-GDP vs. Inflation Targeting, 30y-debt
10 20 30−0.5
−0.25
0
0.25Inflation
10 20 300
0.5
1
1.5GDP
10 20 300
1
2
Debt
10 20 30−1
0
1
2
Debt/GDP
10 20 30−1
−0.5
0
0.5Interest Rate
10 20 30−0.3
−0.15
0
0.15
0.3Real Interest Rate
Γ=0 Γ=1
Frontiers Back
Debt-to-GDP vs. Inflation Targeting, 1q-debt
5 10 15 20 25 30−4
−2
0
2Inflation
5 10 15 20 25 300
0.5
1
1.5GDP
5 10 15 20 25 300
2
4
6
8Debt
5 10 15 20 25 30−2
0
2
4
6Debt/GDP
5 10 15 20 25 30−4
−2
0
2Interest Rate
5 10 15 20 25 30−0.3
−0.15
0
0.15Real Interest Rate
Back
Variance Frontiers and Welfare under Targeting Policies
0 0.01 0.02 0.03 0.04 0.050
0.001
0.002
0.003
0.004
0.005
Var(b)
L 1
Variance Frontier
0 0.2 0.4 0.6 0.80
0.001
0.002
0.003
0.004
0.005
Var(b)
L 1
Variance Frontier
0 0.2 0.4 0.6 0.8 1−0.0006
−0.0004
−0.0002
0
Weight on debt
Wel
fare
Lender Welfare Gain
λ
y=0
λy=0.25
λy=0.5
0 0.2 0.4 0.6 0.8 1−0.0008
−0.0004
0
0.0004
0.0008
Weight on debt
Wel
fare
Borrower Welfare Gain
Γ=1
Γ = 0.01
Γ = 0
Γ=1
Back
Estimation: Structural Parameters
Table 1: Calibrated Parameters in the Medium Scale ModelParameter Description/Target Value
βl Steady-state annual real interest rate 3% 0.9925βb Impatient households’ discount factor 0.97νh Ratio of housing wealth to GDP of 1.35% 0.12ξ Capital share in goods production 0.35µh Capital share in housing production 0.10µla Ratio of value of residential land to annual output of 50% 0.10µib Ratio of business capital to annual GDP of 2.1% 0.10δh Ratio of residential investments to total output of about 6% 0.01δkc Ratio of nonresidential investments to GDP of about 27% 0.025δkh Ratio of nonresidential investments to GDP of about 27% 0.03X, Xwc, Xwh Steady-state mark-up of 15% 1.15m = Rbb/qhb Steady-state ratio of debt to real estate 0.50m Loan-to-value ratio on new mortgages 0.85ρs Annual autocorrelation of trend inflation around 0.9 0.975
Notes: All parameter values follow from Iacoviello and Neri (2010).
Table 2: Estimation: Prior and Posterior Distribution of the Structural ParametersPrior distribution Posterior distribution
1-quarter debt model Long-term debt modelParameter Distribution Mean SD Median 90% HPD Median 90% HPD
γl Beta 0.5 0.075 0.29 0.22 – 0.36 0.26 0.20 – 0.32γb Beta 0.5 0.1 0.42 0.31 – 0.55 0.51 0.41 – 0.62ϕL,l Gamma 0.5 0.1 0.39 0.27 – 0.53 0.42 0.30 – 0.51ϕL,b Gamma 0.5 0.1 0.54 0.38 – 0.70 0.48 0.34– 0.71µl Normal 1 0.1 -0.05 -0.08 – -0.02 -0.05 -0.08 – -0.03µb Normal 1 0.1 1.18 1.02 – 1.31 1.12 0.96 – 1.31φk,c Gamma 10 2.5 20.14 17.09 – 23.29 20.85 18.45 – 23.57φk,h Gamma 10 2.5 10.60 6.76 – 15.02 9.58 7.03 – 12.57$ Beta 0.65 0.05 0.65 0.57 – 0.73 0.62 0.56 – 0.69φR Beta 0.75 0.1 0.61 0.55 – 0.66 0.63 0.57 – 0.68φπ Normal 1.5 0.1 1.42 1.32 – 1.51 1.40 1.31 – 1.50φy Normal 0 0.1 0.56 0.46 – 0.65 0.52 0.44 – 0.68θ Beta 0.667 0.05 0.89 0.87 – 0.91 0.89 0.87 – 0.91υ Beta 0.5 0.2 0.52 0.41 – 0.65 0.55 0.45 – 0.66θw,c Beta 0.667 0.05 0.77 0.73 – 0.81 0.76 0.72 – 0.80ιw,c Beta 0.5 0.2 0.08 0.02 – 0.15 0.07 0.02 – 0.14θw,h Beta 0.667 0.05 0.77 0.72 – 0.81 0.75 0.72 – 0.81ιw,h Beta 0.5 0.2 0.40 0.21 – 0.60 0.42 0.23 – 0.61ζ Beta 0.5 0.2 0.78 0.66 – 0.91 0.80 0.68 – 0.92δ Normal∗ 0.10 0.02 1 – 0.0307 0.0223 – 0.0412
Log data density 6131.05 6415.67
Notes: The median implied value of ϑ is 0.59 in the 1-quarter debt model, and 0.042 in the long-term debt
model. ∗The prior distribution for δ refers only to the long-term debt model because δ = 1 with 1-quarter debt.
The sample is 1965q1 to 2014q1.
31
Back
Estimation: Shock Processes
Table 3: Estimation: Prior and Posterior Distribution of the Shock ProcessesPrior distribution Posterior distribution
1-quarter model Long-term debt modelParameter Distribution Mean SD Median 90% HPD Median 90% HPD
ρz Beta 0.8 0.1 0.95 0.93 – 0.97 0.96 0.94 – 0.98ρAH Beta 0.8 0.1 0.996 0.991 – 0.999 0.996 0.992 – 0.999ρAK Beta 0.8 0.1 0.92 0.90 – 0.95 0.93 0.90 – 0.95ρvh Beta 0.8 0.1 0.97 0.95 – 0.99 0.98 0.96 – 0.99ρc Beta 0.8 0.1 0.96 0.86 – 0.99 0.96 0.95 – 0.99ρνl Beta 0.8 0.1 0.97 0.95 – 0.99 0.97 0.95 – 0.99ρm Beta 0.8 0.1 0.98 0.96 – 0.99 0.78 0.68 – 0.87σz Inv. Gamma 0.001 0.01 0.0100 0.0091 – 0.0110 0.0100 0.0091 – 0.0110σAH Inv. Gamma 0.001 0.01 0.0213 0.0195 – 0.0233 0.0216 0.0198 – 0.0236σAK Inv. Gamma 0.001 0.01 0.0107 0.0089 – 0.0126 0.0111 0.0096 – 0.0127σνh Inv. Gamma 0.001 0.01 0.0382 0.0271 – 0.0508 0.0335 0.0237 – 0.0452σR Inv. Gamma 0.001 0.01 0.0032 0.0027 – 0.0037 0.0030 0.0027 – 0.0034σc Inv. Gamma 0.001 0.01 0.0123 0.0047 – 0.0288 0.0122 0.0078 – 0.0185σνl Inv. Gamma 0.001 0.01 0.0196 0.0161 – 0.0236 0.0192 0.0157 – 0.0233σp Inv. Gamma 0.001 0.01 0.0039 0.0035 – 0.0044 0.0039 0.0035 – 0.0044σs Inv. Gamma 0.001 0.01 0.0280 0.0211 – 0.0348 0.0276 0.0216 – 0.0339σm Inv. Gamma 0.001 0.01 0.0180 0.0165 – 0.0196 0.1069 0.0764 – 0.1368σL,h Inv. Gamma 0.001 0.01 0.1647 0.1511 – 0.1793 0.1624 0.1495 – 0.1787σω,h Inv. Gamma 0.001 0.01 0.0051 0.0047 – 0.0056 0.0050 0.0047 – 0.0056
Notes: σL,h and σω,h are standard deviations for measurement errors in hours worked and wages in the housing
sector. The sample is 1965q1 to 2014q1.
Table 4: Variance DecompositionNon-houseprod.
Mon.pol.
Houseprod.
Housepref.
Inv.spec.prod.
CostInfl.
targetLaborsupply
Intert.Pref.
Lend.std.
GDP 20.88 3.57 2.62 0.41 8.04 3.80 3.55 55.77 1.35 0.01Consumption 24.39 2.76 0.15 0.19 3.50 3.52 3.34 59.55 2.59 0.01Inflation 1.90 1.74 0.05 0.16 0.65 17.58 70.20 1.05 6.55 0.12Residential inv. 0.28 0.78 67.32 18.49 0.04 0.14 0.19 10.31 2.43 0.01Business inv. 14.63 4.11 0.05 0.04 33.05 4.52 4.08 30.39 9.04 0.09Hours cons. 1.68 6.30 0.04 0.04 0.59 6.85 5.12 79.04 0.32 0.03Hours housing 0.48 1.96 24.23 42.23 0.07 0.34 0.50 24.73 5.43 0.03House prices 1.62 0.28 90.16 5.97 0.22 0.29 0.18 0.71 0.57 0.00Interest rate 2.26 5.67 0.17 0.39 3.03 4.10 68.66 2.35 13.09 0.28Wages cons. 1.77 6.60 0.08 0.17 1.52 1.38 68.46 12.98 6.93 0.13Wages housing 1.97 5.97 0.05 0.17 1.45 2.18 66.53 14.23 7.29 0.15Househ. debt 1.96 1.26 2.37 31.84 0.62 2.98 5.86 7.41 6.05 39.66
Notes: Long-run variance decomposition from the estimated model with long-term debt.
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Credit and Housing Shocks - Estimated ModelWhen does debt duration matter if monetary policy does not reactto debt?
0 10 20 30
Housin
g
pre
fere
nce
shock
0
1
2
3Real Debt
1q Debt 73q Debt
0 10 20 30
Housin
g
pro
ductivity
shock
-2
-1
0
0 10 20 30
Lendin
g
sta
ndard
sshock
0
2
4
0 10 20 30-0.1
-0.05
0
Lenders' Consumption
0 10 20 30-0.1
-0.05
0
0 10 20 30-0.1
-0.05
0
0.05
0 10 20 30-0.2
0
0.2
Borrowers' Consumption
0 10 20 30-0.4
-0.2
0
0.2
0 10 20 30-0.2
0
0.2
0 10 20 30
-0.05
0
Aggregate Consumption
0 10 20 30
-0.1
-0.05
0
0 10 20 30-0.05
0
0.05
0.1
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