scholarly journals Out of Sync Subnational Housing Markets and Macroprudential Policies in the UK

De Economist ◽  
2021 ◽  
Author(s):  
Michael Funke ◽  
Petar Mihaylovski ◽  
Adrian Wende
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Housing Stock ◽  
House Prices ◽  
House Price ◽  
Housing Markets ◽  
Macroprudential Policy ◽  
Macroprudential Policies ◽  
The Uk ◽  
Price Differences

AbstractWe examine whether regionally differentiated macroprudential policies can address financial stability concerns and moderate house price differences in the UK. We disaggregate both the household sector and the housing stock in a two-region DSGE model with out of sync subnational housing markets and compare four policy types: standard monetary policy, leaning against the wind monetary policy, national macroprudential policy or one that targets region-specific LTV ratios. In terms of reducing variances of house prices, regionally differentiated macroprudential policy performs best, provided the policy authorities are concerned with stabilising output and house prices rather than simply minimising the variance of inflation.

Macroprudential policy – closing the financial stability gap

2017 ◽  
Vol 25 (4) ◽  
pp. 334-359 ◽  
Author(s):  
Stephan Fahr ◽  
John Fell
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Relative Effectiveness ◽  
Policy Instruments ◽  
Price Stability ◽  
Macroprudential Policy ◽  
Content Type ◽  
Macroprudential Policies ◽  
Trade Offs ◽  
System Resilience

Purpose The global financial crisis demonstrated that monetary policy alone cannot ensure both price and financial stability. According to the Tinbergen (1952) rule, there was a gap in the policymakers’ toolkit for safeguarding financial stability, as the number of available policy instruments was insufficient relative to the number of policy objectives. That gap is now being closed through the creation of new macroprudential policy instruments. Both monetary policy and macroprudential policy have the capacity to influence both price and financial stability objectives. This paper develops a framework for determining how best to assign instruments to objectives. Design/methodology/approach Using a simplified New-Keynesian model, the authors examine two sets of policy trade-offs, the first concerning the relative effectiveness of monetary and macroprudential policy instruments in achieving price and financial stability objectives and the second concerning trade-offs between macroprudential policy instruments themselves. Findings This model shows that regardless of whether the objective is to enhance financial system resilience or to moderate the financial cycle, macroprudential policies are more effective than monetary policy. Likewise, monetary policy is more effective than macroprudential policy in achieving price stability. According to the Mundell (1962) principle of effective market classification, this implies that macroprudential policy instruments should be paired with financial stability objectives, and monetary policy instruments should be paired with the price stability objective. The authors also find a trade-off between the two sets of macroprudential policy instruments, which indicates that failure to moderate the financial cycle would require greater financial system resilience. Originality/value The main contribution of the paper is to establish – with the help of a model framework – the relative effectiveness of monetary and macroprudential policies in achieving price and financial stability objectives. By so doing, it provides a rationale for macroprudential policy and it shows how macroprudential policy can unburden monetary policy in leaning against the wind of financial imbalances.

scholarly journals An international housing market in the British Isles: Evidence from business and medium-term cycles using a Friedman test

Urban Studies ◽  
2019 ◽  
Vol 57 (2) ◽  
pp. 307-322 ◽  
Author(s):  
David Gray
Keyword(s):  
Market Integration ◽  
Urban Economics ◽  
House Prices ◽  
House Price ◽  
Housing Markets ◽  
Friedman Test ◽  
Medium Term ◽  
Financial Cycle ◽  
Component Approach ◽  
The Uk

It has been averred that there is an international market in housing (inter alia, Adams Z and Füss R (2010) Macroeconomic determinants of international housing markets. Journal of Housing Economics 19(1): 38–50; Helbling T and Terrones M (2003) When Bubbles Burst – Chapter II, World Economic Outlook. April. Washington, DC: IMF; Pomogajko K and Voigtländer M (2012) Co-movement of house price cycles – A factor analysis. International Journal of Housing Markets & Analysis 5(4): 414–427). Although some authors examine the business cycle range, the mechanism by which this comes about is more likely to reflect financial market integration and evidence for this should be found in the medium-term cycle range. As a case study, there is an analysis of three associated ‘regional’ housing markets and their price movements. Northern Ireland’s economy is distinct but should be linked to the rest of the UK by common policy shocks, and to Eire through a mutual border. Using a Friedman test, it is found that even this small cluster is not integrated. It is asserted that a housing cycle has both a financial and a business component. As Drehmann et al. (Drehmann M, Borio C and Tstasaronis K (2012) Characterising the financial cycle: Don’t lose sight of the medium term! BIS Working Papers, No. 380, Bank for International Settlements, June) argue, cycles in the medium-term range are significant in housing. A dual component approach highlights the relevance of cyclical interaction for both revealing integration and the need to intervene to moderate cyclical reinforcement for crisis-avoidance. After 1995, Dublin and London are found to be more integrated than before, which is consistent with the international city integration thesis of Holly et al. (Holly S, Pesaran H and Yamagata T (2011) The spatio-temporal diffusion of house prices in the UK. Journal of Urban Economics 69(1): 2–23). Lastly, a simple test for cyclical asymmetry indicates that there is highness (the obverse of deepness, where the troughs are deeper than peaks) in the UK financial cycle.

scholarly journals Monetary Policy, Macroprudential Policy, and Financial Stability

2019 ◽  
Vol 11 (1) ◽  
pp. 809-832 ◽  
Author(s):  
David Martinez-Miera ◽  
Rafael Repullo
Keyword(s):  
Monetary Policy ◽  
Equilibrium Model ◽  
Financial Stability ◽  
Theoretical Perspective ◽  
Capital Requirements ◽  
Equity Capital ◽  
Open Market ◽  
Macroprudential Policy ◽  
Macroprudential Policies

This review reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms’ financing that banks’ equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in fostering financial stability and leads to higher social welfare.

scholarly journals The sources of house price change: identifying liquidity shocks to the housing market

2016 ◽  
Vol 9 (1) ◽  
pp. 98-120 ◽  
Author(s):  
Paloma Taltavull de La Paz ◽  
Michael White
Keyword(s):  
Monetary Policy ◽  
Housing Market ◽  
Error Correction ◽  
House Prices ◽  
Price Change ◽  
Housing Prices ◽  
House Price ◽  
Content Type ◽  
The Uk

Purpose The purpose of this paper is to examine the role of monetary liquidity in house price evolution through examining the Asset (housing) Inflation channel. It identifies the main channels of transmission affecting house prices from monetary supply channels to house price change, examining how the Asset Price channel transmits changes in M1 to housing prices in Spain and the UK. Design/methodology/approach The paper uses Vector Auto Regression (VAR) and Error Correction models to test the Asset Inflation channel in the UK and Spain from 1991 to 2013 in two steps. In the first step, the supply elasticity is estimated through the long-term relationship between house prices and stock supply. The second step estimates a Vector Error Correction (VEC) to explain house price dynamics conditioned on supply reactions. The latter is defined as a long-term inverse demand model where housing prices are controlled by fundamentals in each market. Models allow forecast testing using Choleski impulse responses methodology. Findings Several results are found. In the supply model, both countries show rapid convergence to equilibrium with a larger elasticity of supply in Spain than in the UK but with a short run effect of new supply on prices in the UK. Regarding the Asset Inflation Channel model, the paper finds evidence of the existence of a housing accelerator effect in Spain, but not in the UK where changes in liquidity fully impact house prices in one direction. Research limitations/implications Implications of findings are mainly to forecast the effects of Monetary Policy measures in different economies. Practical implications The model supports the evaluation of different impacts of monetary policy in territories. It shows that the same policy will have different impacts in different housing markets and therefore highlights the importance of examining each market separately to identify the appropriate policy interventions. Originality/value This is the first paper that estimates the impact of the Asset Inflation Channel on house prices that endogenises housing market conditions and compares effects and interrelationships in two different economies.

scholarly journals Macroprudential Policy: Resolution and Continued Challenges

2018 ◽  
Vol 9 (4) ◽  
pp. 43
Author(s):  
Igor M Tomic ◽  
John Angelidis
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Stress Tests ◽  
Financial Industry ◽  
Macroprudential Policy ◽  
Policy Responses ◽  
Macroprudential Policies ◽  
Lehman Brothers ◽  
Financial Firm ◽  
Lengthy Process

In this paper we address three issues; 1) The importance of knowing the exact damage caused by a failing firm, as that knowledge assists in creating more efficient policy responses. The failure of a large and complex financial firm, Lehman Brothers, experienced a very difficult and lengthy process in its resolution; the damage was much greater than expected, leading to a change in policies and specifically to a requirement for stress tests; 2) Macroprudential policies are very helpful as the can address issues in a specific sector, something that monetary policy is not designed for. This means that monetary policy designed to bring output and price stability, when combined with macroprudential tools, provides more financial stability; 3) Although macroprudential policies have stabilized the financial industry, some threats remain and therefore several threats are explored.

The Interaction of Monetary and Macroprudential Policies - Background Paper

Policy Papers ◽  
2012 ◽  
Vol 2012 (106) ◽  
Author(s):  
Keyword(s):  
Monetary Policy ◽  
Side Effects ◽  
Financial Stability ◽  
Interactive Effects ◽  
Price Stability ◽  
Macroprudential Policy ◽  
Macroprudential Policies ◽  
Background Material

This paper provides background material to support the Board paper on the interaction of monetary and macroprudential policies. It analyzes the scope for and evidence on interactions between monetary and macroprudential policies. It first reviews a recent conceptual literature on interactive effects that arise when both macroprudential and monetary policy are employed. It goes on to explore the “side effects” of monetary policy on financial stability and their implications for macroprudential policy. It finally addresses the strength of possible effects of macroprudential policies on output and price stability, and draws out implications for the conduct of monetary policy.

scholarly journals Predicting Downside Risks to House Prices and Macro-Financial Stability

2020 ◽  
Vol 20 (11) ◽  
Author(s):  
Andrea Deghi ◽  
Mitsuru Katagiri ◽  
Sohaib Shahid ◽  
Nico Valckx
Keyword(s):  
At Risk ◽  
Financial Stability ◽  
House Prices ◽  
Emerging Market ◽  
House Price ◽  
Macroprudential Policy ◽  
Financial Conditions ◽  
Advanced Economies ◽  
Price Growth ◽  
Policy Solutions

This paper predicts downside risks to future real house price growth (house-prices-at-risk or HaR) in 32 advanced and emerging market economies. Through a macro-model and predictive quantile regressions, we show that current house price overvaluation, excessive credit growth, and tighter financial conditions jointly forecast higher house-prices-at-risk up to three years ahead. House-prices-at-risk help predict future growth at-risk and financial crises. We also investigate and propose policy solutions for preventing the identified risks. We find that overall, a tightening of macroprudential policy is the most effective at curbing downside risks to house prices, whereas a loosening of conventional monetary policy reduces downside risks only in advanced economies and only in the short-term.

scholarly journals Persistence and cyclical dynamics of US and UK house prices: Evidence from over 150 years of data

Urban Studies ◽  
2019 ◽  
Vol 58 (1) ◽  
pp. 53-72 ◽  
Author(s):  
Giorgio Canarella ◽  
Luis Gil-Alana ◽  
Rangan Gupta ◽  
Stephen M Miller
Keyword(s):  
Structural Changes ◽  
House Prices ◽  
Fractional Integration ◽  
Structural Break ◽  
House Price ◽  
Housing Markets ◽  
Price Dynamics ◽  
Long Run ◽  
The Usa ◽  
The Uk

This paper provides a new and unique look at the dynamics and persistence of historical house prices in the USA and the UK using fractional integration techniques not previously applied to housing markets. Unlike previous research, we consider two components of persistence of house prices: the component associated with the long-run trend and the component associated with the cycle. We find evidence of cyclical and long-run persistence in the UK housing markets. In contrast, we fail to find evidence of cyclical persistence for the USA. For the sub-samples, which account for a structural break in each series, an important difference is the asynchronous pattern of the breaks, an indication of heterogeneity in the house price dynamics of the two countries and a sign that national rather than global events have played an important role. Although the house price movements of the last decade are dramatic, the greatest structural changes in the overall nominal and real price dynamics of the UK and the USA appear to have taken place much earlier, in the late 1970s and early 1980s in the UK and in the mid-1950s and early 1970s in the USA. An important result, common to the whole and sub-samples, is that long-run persistence plays a greater role than cyclical persistence in explaining the dynamics of house prices in both countries. These findings have substantial implications for policy decisions.

scholarly journals Speculative housing markets and rent control: insights from nonlinear economic dynamics

2021 ◽  
Author(s):  
Noemi Schmitt ◽  
Frank Westerhoff
Keyword(s):  
Housing Market ◽  
Housing Stock ◽  
House Price ◽  
Housing Markets ◽  
Market Model ◽  
Market Dynamics ◽  
Rent Control ◽  
Forecasting Accuracy ◽  
Expectation Formation ◽  
Rent Level

AbstractWe propose a novel housing market model to explore the effectiveness of rent control. Our model reveals that the expectation formation and learning behavior of boundedly rational homebuyers, switching between extrapolative and regressive expectation rules subject to their past forecasting accuracy, may create endogenous housing market dynamics. We show that policymakers may use rent control to reduce the rent level, although such policies may have undesirable effects on the house price and the housing stock. However, we are also able to prove that well-designed rent control may help policymakers to stabilize housing market dynamics, even without creating housing market distortions.

scholarly journals Coordination Effects and Optimal Policy Choices of Macroprudential Policy and Monetary Policy

Complexity ◽  
2020 ◽  
Vol 2020 ◽  
pp. 1-11
Author(s):  
Haifeng Pan ◽  
Dingsheng Zhang
Keyword(s):  
Monetary Policy ◽  
Social Welfare ◽  
Optimal Policy ◽  
Real Estate Market ◽  
Macroprudential Policy ◽  
Monetary Policies ◽  
Policy Rules ◽  
Monetary Policy Rules ◽  
Macroprudential Policies ◽  
Dynamic Stochastic

Considering three monetary policy rules, together with two endogenous macroprudential policies that are credit constraints (loan to value, LTV) for households and counter-cyclical capital (capital requirement ratio, CRR) for bankers, this paper establishes a dynamic stochastic general equilibrium (DSGE) model. Based on the welfare analysis of different combinations of macroprudential rules and monetary policy rules, this paper identifies the optimal policy combinations and analyzes the coordination effects between macroprudential policies and monetary policies. The results show that no matter what kind of monetary policy rules is implemented, the introduction of macroprudential rules has improved the level of total social welfare. In the optimal “two pillars” framework of monetary policies and macroprudential rules, the main objective of monetary policy is to stabilize price inflation, and the macroprudential policy to be implemented is the CRR macroprudential policy. This combination can effectively promote the stability of the real estate market, financial market, and macroeconomy, while maximizing the improvement of total social welfare.

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