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Housing Channels of Monetary Policy Transmission in European Industrial and Transition Countries Stanimira Milcheva and Steffen Sebastian University of Regensburg Motivation What is the role of the housing market in the monetary policy transmission to consumption and residential investment? Hypothesis: Housing markets play an important role for the transmission of monetary shocks to consumption and investment in countries with flexible and well developed mortgage markets. Milcheva • Housing Channels of Monetary Policy Transmission Housing Channels of Monetary Policy Transmission Monetary policy shock Interest rate channel Credit channel House Prices Cost of capital effect Tobin‘s Q effect Residential investment Interest rate income effect Housing wealth effect Rents and savings effect Collateral effect Consumption Milcheva • Housing Channels of Monetary Policy Transmission Institutional factors Country Year Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Sweden UK US Bulgaria Czech Republic Estonia Hungary Lithuania Poland Slovenia Mortgage Mortgage market debt outst. index of (from MFIs) completeness to GDP 2008 2008 31% 25.3% 34% 39.8% 82% 95.3% 49% 47.5% 23% 35.9% 28% 46.1% 35% 32.0% 39% 80.0% 26% 19.8% 71% 99.1% 59% 53.3% 63.3% 40% 62.0% 66% 60.6% 58% 80.5% 98% 77,0% 11.6% - 10.8% 39.2% 14.0% 17.3% 15.6% 9.1% Average typical LTV ratio Total outst. securitization from resid. lending 2008 84% 80% 80% 70% 91% 72% 58% 83% 65% 100% 70% 56% 61% 80% 77% 75% 80%-90% 80,0% 80,0% 70,0% 91,0% 72,0% 58,0% 83,0% 65,0% 100,0% 70,0% 56,0% 61,0% 80,0% 77,0% 75,0% 0% Prevailing type of mortgage rate 2007 variable fixed (>10y) fixed variable fixed (>10y) fixed (>5y) variable variable variable fixed (>5y) variable variable variable fixed (>1y) variable initial fixed variable 56% 100% 61% 75% 90% 61% 56% 0% 48% 0% 1% 0% initial fixed fixed until 2005 variable variable variable Mortgage equity withdraw (MEW) 2003-2007 no no yes yes no no no limited no yes yes limited yes yes yes - Refinancing (fee-free prepayment) - - no no yes yes no no no yes no no no no no yes limited yes - Milcheva • Housing Channels of Monetary Policy Transmission Methodology • Estimation of vector autoregression (VAR) models for 21 European countries and the US. • Counterfactual simulation of impulse responses. (see Bernanke et al. (1997)) Milcheva • Housing Channels of Monetary Policy Transmission Existing Literature Ludvigson et al. (2002): SVAR with total wealth, counterfactual simulation, US, 1966:1 – 2000:3, insignificant effect of the wealth channel on consumption in the US. Giuliodori (2005): VAR with house prices, counterfactual simulation, 9 European industrial countries, 1979:3 – 1998:4, house prices play an important role for the transmission of monetary policy shocks to GDP in countries with well developed housing markets, such as Sweden, Spain, the Netherlands. Elbourne (2008): SVAR with house prices, counterfactual simulation, UK, 1987:M1 – 2003:M5, house prices play a small role in the monetary policy transmission mechanism. Milcheva • Housing Channels of Monetary Policy Transmission Contribution • A more in-depth study of the monetary policy transmission through housing • Broader sample of countries, including Central and Eastern European (CEE) countries • Same model applied to all countries • Accounting for structural breaks • Time period after the liberalisation of the mortgage markets • Specifying the role of each housing channel on consumption and investment • Accounting for significance of simulated impulse responses Milcheva • Housing Channels of Monetary Policy Transmission Data Countries • Industrial countries: AU, BE, DK, DE, GR, FI, FR, IR, IT, NL, NO, ES, SE, UK, US • CEE countries: BG, CZ, EE, HU, LT, PL, SI Estimation period Variables From mid-1990s to 2008 (quarterly) consumer price index household consumption gross fixed capital formation in housing house price index money market rate Milcheva • Housing Channels of Monetary Policy Transmission Results: Shock in IR HP Milcheva • Housing Channels of Monetary Policy Transmission Results: Shock in IR HP Milcheva • Housing Channels of Monetary Policy Transmission Countries with significant housing wealth/collateral effects Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response. Milcheva • Housing Channels of Monetary Policy Transmission Countries with significant housing wealth/collateral effects Dark blue line: estimated impulse response of consumotion to an interest rate shock., red line: simulated impulse response, blue line: simulated respinse when GFCF=0 in consumotion equation. Milcheva • Housing Channels of Monetary Policy Transmission Results: Shock in HP GFCF Milcheva • Housing Channels of Monetary Policy Transmission Countries with significant Tobin‘s Q effects Dark blue line: estimated impulse response, red line: simulated impulse response of consumotion to an interest rate shock. Milcheva • Housing Channels of Monetary Policy Transmission Thank you! Milcheva • Housing Channels of Monetary Policy Transmission Milcheva • Housing Channels of Monetary Policy Transmission Milcheva • Housing Channels of Monetary Policy Transmission