Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
HOUSEHOLD LEVERAGE AND SOVEREIGN RISK Comments Juan F. Jimeno (Research Division) CONFERENCE: “Debt and Credit, Growth and Crises” Madrid 18-19 June 2012 THE PAPER (I) • Main objective • Explanation of cross-country GDP and employment growth in the Eurozone (EZ) during the crisis • Using the US experience as a starting point (Mian and Sufi, 2010, Midrigan and Philippon, 2010) • In the EZ: A two-stage story of the crisis (Two stages ?): • 2007-2010: Deleveraging in the private sector • 2010-?: Fiscal consolidation and sovereign crisis • Cross-country differences in household leverage and financing costs to Governments, respectively, can explain cross-country differences in GDP, consumption, and employment growth in 2007-2009 and 2010-2011. RESEARCH DIVISION 2 THE PAPER (II) • Method •Calibration of DSGE model with credit frictions (still preliminary) • “Islands” with representative consumers • Cash-in-advance-constraint with two sources of “money” • Two sectors (tradables, non-tradables) with sector-specific labor • Sticky wages • Intertemporal substitution modeled as adjustment costs to asset holdings • Government and private lenders are perfect substitutes. No monetary policy (M=1). Fiscal transfers providing money. • Extension (and simplification) of Midrigan and Philippon (2010) to account for fiscal policy •Two exogenous shocks: • collateral constraint to private credit • financing costs of Governments RESEARCH DIVISION 3 MAIN QUESTION • Do the model’s assumptions fit well with the European experience to be explained? • Empirical evidence on the credit-consumption channel • The different nature of the crisis across EZ countries • Asymmetries and imbalances in the EZ • Credit boom, deleveraging and sovereign risk premia RESEARCH DIVISION 4 COMMENT #1: RELATIONSHIP BETWEEN CREDIT AND CONSUMPTION IN EUROPE Alberola, Molina and del Rio (2012) RESEARCH DIVISION 5 COMMENT #1: RELATIONSHIP BETWEEN CREDIT AND CONSUMPTION IN EUROPE 1. The role of housing as a source of liquidity • UK : Increases in housing prices led to more borrowing Bridges, Disney and Gathergood (2009). • DK: Introduction of home equity loans led to increases in consumption. Leth-Petersen (2010) • Less evidence for other economies, as equity withdrawal less intense SP: Bover (2005): Estimation of wealth effects. Not very large. Marques and Nieto (2003): Mortgage refinancing did not increase as a result of higher house prices. (Update: only in 2005 increase in mortgage debt > increase in housing investment) 2. But even without home equity withdrawals, mortgage credit conditions may affect household consumption (SP: Masier and Villanueva, 2011). • Longer mortgage maturity partly allows to diminish the mortgage payment and increase consumption by recent home owners • Specially important if expect income to be higher later in life 3. On the downside: Are households/firms credit-constrained? • Disentangling demand-supply of credit SP: Hernando and Villanueva (2012): “relatively small magnitude of credit supply factors” RESEARCH DIVISION 6 Table 2: OLS impacts of interest rates and maturity on non-durable consumption Impact of a 100 bp Impact of a one year Income growth increase in R increase in M 50-65 years Panel A: Average impact (1) (2) (3) 1.Total effect -.0335 .0133 (.0180)* (.0069)** Panel C: By schooling of hhold head 2. Basic schooling .0216 (.026) .016 (.011) -.126 (.071)* 3. High school .023 (.032) .029 (.010)** -.099 (.077) -.11 (.026)** .007 (.008) -.14 (.08)* 4. College Estimation method: group -specific OLS. Robust standard errors in parentheses. Sample of home owners observed in 2002/2005 who acquired their house with a mortgage between 1991 and 2006. RESEARCH DIVISION 7 Table 3: The impact of R and M on non-durable consumption Impact of a 100 bp Impact of a one year increase in R increase in M (1) (2) Panel B: By income group 2. Below median income .0046 -.003 (.042) (.014) 3. 50th< Y < 75th centile -.028 (.035) Sample size .025 (.012)** 454.2 615.2 4. Top income quartile -.066 .013 785.4 (.039)* (.01) Estimation method: group -specific OLS. Robust standard errors in parentheses. Sample of home owners observed in 2002/2005 who acquired a mortgage in 1992-2006. Other Xs: permanent income, age at purchase, year of purchase, revaluation of house value, fa savings bank dummy, 4 dummies with current age of spouse RESEARCH DIVISION 8 LEVERAGE AS DRIVING CONSUMPTION: EVIDENCE FOR SPAIN • Spanish Survey of Household Finances, (EFF 2002, 2005, 2008) • A panel that allows tracking the consumption, labor supply, wealth and debt of households • The evolution of household expenditure in vehicles between 2002 and 2008 by the leverage ratio in 2002 • Some evidence of higher cyclicality of the expenditure in durables among indebted households RESEARCH DIVISION 9 RESEARCH DIVISION 10 MAIN QUESTION • Do the model’s assumptions fit well with the European experience to be explained? • Empirical evidence on the credit-consumption channel • SOME EMPIRICAL SUPPORT. LIKELY TO BE RELEVANT. BUT PROBABLY LESS STRONG THAN IN THE US • The different nature of the crisis across EZ countries • Asymmetries and imbalances in the EZ • Credit boom, deleveraging and sovereign risk premia RESEARCH DIVISION 11 COMMENT #2. SAME SHOCK? SAME (LABOR MARKET) TRANSMISSION MECHANISMS? 0.1 Luxembourg Malta Austria Finland France Greece Italy SloveniaEA17 Belgium Germany Cyprus Netherlands 0.05 0 Slovakia Portugal -0.05 Spain -0.1 G D P Ireland -0.15 Estonia -0.2 -0.2 -0.15 -0.1 -0.05 0 0.05 0.1 Employment growth (%) vs. GDP growth (2007q2-2010q2) RESEARCH DIVISION 12 COMMENT #2. SAME SHOCK? SAME (LABOR MARKET) TRANSMISSION MECHANISMS? 0.15 Estonia 0.1 0.05 Luxembourg Germany Malta Belgium Netherlands France EA17 Italy Eslovenia Slovakia Austria 0 Finland Cyprus Ireland Portugal Spain -0.05 G D P -0.1 Greece -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08 0.1 -0.15 0.12 Employment growth (%) vs. GDP growth (20010q2-2011q4) RESEARCH DIVISION 13 MAIN QUESTION • Do the model’s assumptions fit well with the European experience to be explained? • Empirical evidence on the credit-consumption channel • The different nature of the crisis across EZ countries • DIFFERENT SHOCKS. • DIFFERENT LABOR MARKET RESPONSES DIFFICULT TO EXPLAIN WITH SAME DEGREE OF LABOR MARKET RIGIDITIES ACROSS COUNTRIES • Asymmetries and imbalances in the EZ • Credit boom, deleveraging and sovereign risk premia RESEARCH DIVISION 14 COMMENT #3. ASYMMETRIES AND IMBALANCES • Lower productivity growth in the periphery during 1999-2007… • … and higher wage pressure, led to Alberola, Molina and del Rio (2012) RESEARCH DIVISION 15 COMMENT #3. ASYMMETRIES AND IMBALANCES • …and together with lax fiscal policies to Alberola, Molina and del Rio (2012) RESEARCH DIVISION 16 COMMENT #3. ASYMMETRIES AND IMBALANCES • but could have a more restrictive fiscal policy avoided the increase in external debt? Assume government consumption would have stayed constant, in per capita terms, at its 19981s level for 10 years (Scenario #1) or 20 years (Scenario #2). Beyond 2008 in Scenario #1, 2018 in Scenario #2, government consumption represents again a 17:3% of GDP in each period. Gavilán, Jimeno, Hernandez de Cos, and Rojas (2010) RESEARCH DIVISION 17 MAIN QUESTION • Do the model’s assumptions fit well with the European experience to be explained? • Empirical evidence on the credit-consumption channel • The different nature of the crisis across EZ countries • Asymmetries and imbalances in the EZ • COMPETITIVENESS, EXTERNAL IMBALANCES ARE KEY TO UNDERSTAND EZ CRISIS • Credit boom, deleveraging and sovereign risk premia RESEARCH DIVISION 18 COMMENT #4. SOURCES OF SHOCKS • Endogenous leverage • The role of banks (and shadow banking) at generating credit cycles • Nuño and Thomas (2012) • Martinez-Miera and Suarez (2012) • Factors behind the financing cost of EZ Governments ? • Only fiscal variables? • Contagion effects? • Interactions public-private sectors? • Other variables? RESEARCH DIVISION 19 FINANCING COST OF GOVERNMENTS 03-Jun-12 03-May-12 3,500 03-Apr-12 3,500 03-Mar-12 4,000 03-Feb-12 4,000 03-Jan-12 4,500 03-Dec-11 4,500 03-Nov-11 5,000 03-Oct-11 5,000 03-Sep-11 5,500 03-Aug-11 5,500 03-Jul-11 6,000 03-Jun-11 6,000 03-May-11 6,500 03-Apr-11 6,500 03-Mar-11 7,000 03-Jan-11 7,000 03-Feb-11 Spain: 10y bond yield July 7th: 4.71 % July 11th: Spain wins FIFA World Cup August 27th: 3.98 % October 14th: 3.92% RESEARCH DIVISION 20 THANKS FOR YOUR ATTENTION ¡¡¡ RESEARCH DIVISION BACK RESEARCH DIVISION 22