Abstract:
This thesis examines the role of a financial accelerator mechanism for housing in
the context of a small open economy. Following the seminal financial accelerator
framework in a Dynamic Stochastic General Equilibrium (DSGE) model set out by
Bernanke, Gertler and Gilchrist (1999) (BGG), Aoki, Proudman and Vlieghe (2002,
2002a, 2004) (APV) examine the role of the financial accelerator for the housing
market. In my basic model (Chapter 2), I extend the analysis of APV from a closed
economy to a small open economy in which imports are used as intermediate inputs
into the production process and foreign demand for domestically produced goods is
influenced by the real exchange rate. Unlike APV, I set the endowment of housing
to be consistent with the nature of consumer behaviour, in that “rule of thumb”
(ROT) consumers (who do not save) are renters, further differentiating them from
“permanent income hypothesis” (PIH) consumers.
I find that in contrast to APV, the financial accelerator effect does not increase
the responsiveness of consumption and output to various shocks. This is due in
part to the endowment of housing being restricted to PIH households. I find that
the presence of a financial accelerator increases the responsiveness of the housing
market to nominal interest rate, technology, and foreign shocks.
Moreover, even though the financial accelerator reduces the reaction of the nonhousing
variables to shocks, there is still a positive correlation between house prices
and consumption, consistent with the widely observed empirical relationship between
the two. Furthermore, given that PIH households have access to the capital
markets, the model does not rely on a wealth effect to generate this correlation even
though homeowners can engage in housing equity withdrawal.
In Chapter 3 I extend the DSGE model to include a more fully specified fiscal
sector. I find that consistent with the RBC view of fiscal policy, a positive government
spending shock has a negative impact on the housing market. Using the type
of fiscal rule proposed by Gal´ı, Vall´es and L´opez-Salido (2004), I find that government
spending crowds out private consumption, including the purchase of housing
services and has a negative impact on house prices. Despite the positive short-term
impact on output, tax increases that would ultimately fund the spending shock act
as a drag on consumption. In Chapter 4 I examine the New Zealand empirical data in order to see whether
a financial accelerator effect can be detected. Using a small seven variable Structural
Vector Auto-Regression model I find that shocks to house prices do not have a
significant impact on the mortgage rate-benchmark interest rate spread in the manner
suggested by the financial accelerator model. This may be due to other costs
(such as funding mortgage lending through the international swap market by New
Zealand banks) having a significant impact on the setting of mortgage rates and
thus the spread. I also find that government spending does not appear to have a
significant impact on house prices and the median response is mildly negative - consistent
with the result from the DSGE model. Nevertheless, the SVAR does detect
a significant relationship between shocks to house prices and household consumption.
