Working Paper: CEPR ID: DP8386
Authors: John Muellbauer; David M Williams
Abstract: Changes in credit market architecture are an important but unobservable structural influence on economic activity. For Australian data, we model non-price credit supply conditions within equilibrium correction models of consumption, house prices, mortgage credit and housing equity withdrawal. Our "latent interactive variable equation system" (LIVES) employs a single latent variable to capture evolutionary shifts (in credit conditions) that affect not only the intercept of each equation, but also interact with key economic variables. We show that credit conditions impact on consumption by: (i) lowering the mortgage downpayment constraint facing young households; (ii) introducing a housing collateral channel from house prices to real activity; and (iii) facilitating intertemporal consumption smoothing.
Keywords: Consumption; Credit Conditions; House Prices; Wealth
JEL Codes: E02; E21; E44; G21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relaxing the mortgage downpayment constraint (G21) | increase in mortgage demand (G21) |
| increase in mortgage demand (G21) | raise consumption (E21) |
| increase in mortgage demand (G21) | raise house prices (R31) |
| relaxing the mortgage downpayment constraint (G21) | raise consumption (E21) |
| relaxing the mortgage downpayment constraint (G21) | raise house prices (R31) |
| rising house prices (R31) | increase in consumption (E21) |
| rising house prices (R31) | access to capital gains for consumption or debt consolidation (G51) |
| higher house prices (R21) | larger deposits for young households (G51) |
| larger deposits for young households (G51) | decrease in consumption (E21) |
| easing credit conditions (E51) | facilitate intertemporal consumption smoothing (D15) |
| facilitate intertemporal consumption smoothing (D15) | increase significance of real interest rates and income growth expectations in consumption decisions (D15) |