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Credit Constraints, Housing Finance and the Monetary Transmission to Consumption

  • Author(s): Pan, Xuefeng
  • Advisor(s): Chauvet, Marcelle
  • et al.
Abstract

This dissertation is intended to study the effect of housing wealth on consumption. It first builds a panel of micro home prices in U.S. and evidences a credit channel that finances consumption by home equity withdrawals. More importantly, the size of the credit channel is found to be much bigger than the one in the literature with aggregate home prices. Next, it shows that the credit channel is also working in China but is enabled by private credits from relatives and friends, not by bank credits as in U.S., though it is neutralized by precautionary savings due to uncertainties out of bad health and raising children under the one-child policy. Moreover, this dissertation shows in aggregate data that a fall in monetary policy rate reduces the prime mortgage spread over safe rate and induces banks to increase the supply of risky high-yield mortgages. This process heats the housing market and home equity withdrawals, suggesting a monetary transmission to consumption via the housing sector.

Data in this dissertation is from the Consumer Expenditure Survey 2001-2006, the Survey of Consumer Finance 2004 and 2007, the China Household Finance Survey 2013, and the St. Louis Fed FRED 1992-2006. Strategies are an estimated representative agent model with housing wealth and varying MPC that views an excess consumption response to housing wealth growths by constrained households as evidence of a credit channel, and a Sequential VAR that first captures the response of the prime mortgage spread to monetary shocks, then that of risky mortgages to changes in the spread, and finally the response of housing sector to developments in risky mortgages.

This dissertation adds to the literature by building and utilizing micro home prices that produce new results on the housing wealth effect, by showing that home equity withdrawals for consumption are independent of specific housing finance institutions, and by proving that monetary policy shocks also transmit to consumption through the housing sector, in addition to the balance-sheet channel often found.

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