lecture 7 - Monetary policy and the housing market Flashcards
what do price of houses reflect?
the price for houses reflect the value of the access to collateralised loans
what is the house price accelarator
when house prices fall, fewer loans are availiable and the money multiplier falls. when fewer loans are availiable (loan to value ratio falls) and house become cheaper.
what does Bahaj, Saleem, Angus Foulis, and Gabor Pinter. (2020.) say about home value and small business?
Paper suggests that a 1% increase in real estate prices
leads, through this channel, to up to a 0.28% rise in
business investment and a 0.08% rise in total wages paid.
how is collateral a way to reduce the risk of lending?
in case of a default, a bank can repossess the collateral and sell it recovering part of the loans value, repossession is costly however so the recovered value is lower than the value of the collateral. the ratio of the laon to the value of collateral is called the loan to collateral value ratio
how can policy be implemented to prevent falls in the loan to value of collateral?
when the LTV or the house prices fall. the amount of loans fall as well, to avoid deflation, the central bank should do monetary expansion whenever the LTV falls. alternativelly the CB can implement a macroprudential or fiscal policy in order to increase the LTV. ( subsidize lending, provide loan guarentee, subsidise the costs of repossesion, pay some subsidies to buyers and increase the price of house
what are the assumptions for the model with collateral constraint?
Banks are a financial intermediary: which can use reserves as inputs and can generate loans as outputs
banks care about the loan safety: banks take collateral, if the loans is not repaid they sell the collateral, recovery rate is the value of the collateral minus repossesion cost divided by the value of the loan. loan to collateral value ratio depends on the risk of lending
whats optimal monetary policy?
government objective is to stabilise output and inflation. we will see that reduction in LTV or in house prices (the value of collateral) will need monetary expansion
what if the government did not act?
We (with Šarūnas Girdėnas) have simulated 1% fall in collateral ratio, q
No QE would result in deflation and recession.
what occured in the crisis of 2008
decline in LTV
decline in house prices
lower investment and demand
expansionary monetary policy
what is the federal fund target rate?
upper limit = 0.25%
what is the zero lower bound?
the zero lower bound is a macroeconomic problem that occurs when the short term nominal interest rate is at or near zero causing a liquidity trap and limitating the capacity that the central bank has to stimulate the economic growth
JAPAN 1980, Milton Friedman?
during the 1970s there was a bubble period where monetary growth was very high. in 1989, the bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for while. the stock market broke
the economy went into a recession and been in a state of quasi recession ever since. monetary growth has been too low. they pushed the interest rates down to zero. they can buy long term government securities, and they can keep buying them and providing high powered money until the high powered money starts getting the economy in an expansion
what can affect the loan to collateral value ratio?
default rate - probability of default on the loan
recovery rate - expected change of price of collateral. cost of repossesion ( including time for selling of the repossessed house), availiability of funds/government insurance
what does LTV increase with?
expected prices of the collateral
return on the loans
what does the LTV decrease with?
probability of default
costs of repossesion
risk free rate
volatility of the future price
