Leaning Against the Credit Cycle

Leaning Against the Credit Cycle

Paolo Gelain^1,2 Kevin Lansing³ Gisle Natvik^4,1

1Norges Bank

2European Central Bank

3Federal Reserve Bank of San Francisco

4BI Norwegian Business School

Refit workshop

Norges Bank

April 2017

1Any views expressed here are those of the authors, and not those of Norges Bank, the European Central Bank or the Federal Reserve Bank of San

Francisco.

Introduction

I

Recent monetary policy debate: Emphasis on debt

I Credit typically moves gradually and persistently over time

I The“Credit cycle”(Drehman, Borio, Tsatsaronis, 2012, etc)

I Schularik and Taylor (2012): Debt matters for the risk and cost of crises

I “... policymakers ignore credit at their peril”

I Mason and Jayadev (2014): Household leverage largely driven by income growth, inflation and interest rates rather than new borrowing.

I Svensson (2013): Interest rate hikes likely to raise debt-to-GDP

I Do not address a high debt-to-GDP ratio with interest rate hikes

Introduction

I

Recent monetary policy debate: Emphasis on debt

I Credit typically moves gradually and persistently over time

I The“Credit cycle”(Drehman, Borio, Tsatsaronis, 2012, etc)

I Schularik and Taylor (2012): Debt matters for the risk and cost of crises

I “... policymakers ignore credit at their peril”

I Mason and Jayadev (2014): Household leverage largely driven by income growth, inflation and interest rates rather than new borrowing.

I Svensson (2013): Interest rate hikes likely to raise debt-to-GDP

I Do not address a high debt-to-GDP ratio with interest rate hikes

I Problem:

Standard DSGE models used for monetary policy analysis do not account well for debt dynamics

I Key assumption: All debt fully amortized each period.

Mortgage Debt Dynamics – Data vs Standard Model

I Problem:

Standard DSGE models used for monetary policy analysis do not account well for debt dynamics

I Key assumption: All debt fully amortized each period.

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

−0.2

−0.15

−0.1

−0.05 0 0.05 0.1 0.15 0.2 0.25

Debt−to−GDP, U.S. DATA Debt−to−GDP, 1 quarter

Our Paper

I

Monetary policy in a simple New Keynesian model with long term debt

I Collateral constraint (Iaccoviello, 2005)

I Long term debt – only new loans constrained

I Q1: What is the likely effect of an interest rate hike on the aggregate debt burden?

I Q2: What are the consequences of mechanically raising the interest rate in response to debt?

I Q3: What characterizes Debt-to-GDP targeting vs. Inflation targeting?

I

Estimate a medium scale DSGE model

I Is long-term debt quantitatively relevant?

I Do the answers to Q1-Q3 hold within richer, estimated model and more shocks?

Our Paper

I

Monetary policy in a simple New Keynesian model with long term debt

I Q1: What is the likely effect of an interest rate hike on the aggregate debt burden?

I Small, persistent, possibly positive in the short run.

I Q2: What are the consequences of mechanically raising the interest rate in response to debt?

I Q3: What characterizes Debt-to-GDP targeting vs. Inflation targeting?

I

Estimate a medium scale DSGE model

I Is long-term debt quantitatively relevant?

I Do the answers to Q1-Q3 hold within richer, estimated model and more shocks?

Our Paper

I

Monetary policy in a simple New Keynesian model with long term debt

I Q1: What is the likely effect of an interest rate hike on the aggregate debt burden?

I Q2: What are the consequences of mechanically raising the interest rate in response to debt?

I Indeterminacy

I Debt-to-GDP stabilized only by anegativedebt-to-GDP response

I Q3: What characterizes Debt-to-GDP targeting vs. Inflation targeting?

I

Estimate a medium scale DSGE model

I Is long-term debt quantitatively relevant?

I Do the answers to Q1-Q3 hold within richer, estimated model and more shocks?

Our Paper

I

Monetary policy in a simple New Keynesian model with long term debt

I Q1: What is the likely effect of an interest rate hike on the aggregate debt burden?

I Q2: What are the consequences of mechanically raising the interest rate in response to debt?

I Q3: What characterizes Debt-to-GDP targeting vs. Inflation targeting?

I Whenever inflation targeting implies a debt-to-GDPincrease, debt-to-GDP stabilization implies a more expansionarypolicy

I

Estimate a medium scale DSGE model

I Is long-term debt quantitatively relevant?

I Do the answers to Q1-Q3 hold within richer, estimated model and more shocks?

Our Paper

I

Monetary policy in a simple New Keynesian model with long term debt

I Q1: What is the likely effect of an interest rate hike on the aggregate debt burden?

I Q2: What are the consequences of mechanically raising the interest rate in response to debt?

I Q3: What characterizes Debt-to-GDP targeting vs. Inflation targeting?

I

Estimate a medium scale DSGE model

I Is long-term debt quantitatively relevant?

I Correlation patterns in model closer to empirical (US) counterparts

I Do the answers to Q1-Q3 hold within richer, estimated model and more shocks?

Our Paper

I

Monetary policy in a simple New Keynesian model with long term debt

I Q1: What is the likely effect of an interest rate hike on the aggregate debt burden?

I Q2: What are the consequences of mechanically raising the interest rate in response to debt?

I Q3: What characterizes Debt-to-GDP targeting vs. Inflation targeting?

I

Estimate a medium scale DSGE model

I Is long-term debt quantitatively relevant?

I Do the answers to Q1-Q3 hold within richer, estimated model and more shocks?

I Yes.

Our Paper

I

Key mechanism: “Fisher dynamics”

Related Literature

I ”Credit cycle”:

Drehman et al. (2012), Aikman et al. (2013), Strohsal et al. (2015), Runstler and Vlekke (2015), Iacoviello (2015), Galati et al. (2016)

I Monetary policy and debt-to-GDP:

Svensson (2013), Las´ een and Strid (2013), Robstad (2014), Alpanda and Zubairy (2016), Bauer and Granziera (2016)

I Multiperiod debt:

Campbell and Hercowitz (2004), Rubio (2011), Kydland et al. (2012), Justiniano et al. (2013), Garriga et al. (2013), Calza et al. (2013), Chen et al. (2013), Andr´ ees et al. (2014), Guerrieri and Iacoviello (2015)

I Debt and inflation:

Mason and Jayadev (2014), Gomes et al.

(2014)

Simple NK Model with Housing and Long-Term Debt

I

Two household types: Savers (patient) and Borrowers (impatient)

I Borrowing subject to collateral constraint on new loans only

I Reduced form law of motion for amortization as in Kydland, Rupert and Sustek (2013)

I

Firms owned by Savers

I

Central bank

I

Fixed supply of houses

I

Calvo pricing, price indexation and consumption habits

Household Problem

Maximize

E0

∞

X

t=0

β^tUt(ct, ht, Lt),

subject to budget and borrowing constraints:

c_b,t+qt(h_b,t−hb,t−1) +1 +rt−1

π_t bb,t−1=w_b,tL_b,t+b_b,t

,

1 +r_t + (1−ϑ) (1−δt−1)bb,t−1

π_t

.

I ϑ=

refinancing share

I δt

amortization share

Amortization Process

δt =

1− lt

b_t

δ_t−1^α + lt

b_t(1−α)^κ,

where

lb,t=bb,t−(1−δt−1)bb,t−1

πt

I α∈[0,1)

and

are parameters and

I l_t/b_t+1

is the share of new annuity loans in the end-of-period

outstanding stock of debt.

Debt Contract

0 50 100

0 5000 10000

A. QUARTERLY PAYMENTS

0 50 100

0 0.5 1 1.5 2

2.5x 10⁵ B. BALANCE

0 50 100 150

0 50 100

C. COMPOSITION OF PAYMENTS

0 50 100 150

−10

−5 0

5x 10D. APPROXIMATION ERROR⁻⁴

Calibration

I

Steady state targets

I Share of liquidity constrained, relative hours worked and relative labor incomes in Justiniano, Primiceri and Tambalotti (2013)

I Ratio of housing wealth to yearly consumption in Iaccoviello and Neri (2010)

I Approximate 30-year annuity loan contract, as in Kydland, Rupert, Sustek (2013)

I Household debt-to-housing value equal to0.5

Calibration

I

Steady state targets

I Share of liquidity constrained, relative hours worked and relative labor incomes in Justiniano, Primiceri and Tambalotti (2013) (n,νl,l,νl,b,$)

I Ratio of housing wealth to yearly consumption in Iaccoviello and Neri (2010) (νh)

I Approximate 30-year annuity loan contract, as in Kydland, Rupert, Sustek (2013) (κ,α)

I Household debt-to-housing value equal to0.5(ϑ)

Table: Parameter Values

β_l

0.99

1

6

0.8

β_b

0.97

0.5

0.75

0.9

0.5

1.5

0.33

0.75

Monetary Policy Shock

10 20 30

−0.2

−0.1 0 0.1 0.2

Interest Rate

10 20 30

−0.2

−0.1 0 0.1 0.2

Inflation

10 20 30

−0.2

−0.1 0 0.1 0.2

GDP

10 20 30

−0.6

−0.3 0 0.3 0.6

House Prices

10 20 30

−3

−2

−1 0 1 2

Household Debt

10 20 30

−3

−2

−1 0 1 2

New Loans

10 20 30

−3

−2

−1 0 1 2

Debt/GDP

10 20 30

−1

−0.5 0 0.5 1

Amortization

1q−Debt 30y−Debt

Slow-Moving Debt Burden and Variable vs Constant Amortization Rate

20 40 60 80 100 120

−0.4

−0.2 0 0.2 0.4

Household Debt

20 40 60 80 100 120

−0.4

−0.2 0 0.2 0.4

Debt/GDP

20 40 60 80 100 120

−3

−2

−1 0 1

New Loans

20 40 60 80 100 120

−0.1 0 0.2 0.4 0.6

Amortization Rate

30y Fixed Amortization 30y Annuity Loan

Policy Implication?

I

If we accept that tighter monetary policy raises the debt burden:

I What is the implication for systematic monetary policy?

I

First approach: What are the consequences of letting the interest rate systematically respond to debt-to-GDP?

I

Simple policy rule

R_t= (1 +r)π^φ_t^π b_t

y_t φ_b/y

Determinacy Analysis – Reacting to Debt-to-GDP

0 0.2 0.4 0.6 0.8 1

0.94 0.96 0.98 1 1.02

φ_b/y φπ

Determinacy

Indeterminacy 1q−debt

0 0.2 0.4 0.6 0.8 1

1 2 4 6 8 10

Determinacy

Indeterminacy

φ_b/y φπ

10y−debt

0 0.2 0.4 0.6 0.8 1

1 4 8 12 16

Determinacy

Indeterminacy

φ_b/y φπ

20y−debt

0 0.2 0.4 0.6 0.8 1

1 6 12 18 24

Determinacy

Indeterminacy

φ_b/y φπ

30y−debt

Determinacy Analysis – Reacting to the Real Debt Level

0 0.5 1

0.92 0.94 0.96 0.98 1

φ_b

φ π

Determinacy

Indeterminacy 1q−debt

0 0.5 1

12 4 6 8 10

Determinacy

Indeterminacy

φ_b

φ π

10y−debt

0 0.5 1

1 4 8 12 16

Determinacy

Indeterminacy

φ_b

φ π

20y−debt

0 0.5 1

1 6 12 18 24

φ_b

φ π Determinacy

Indeterminacy 30y−debt

Determinacy Analysis. Intuition

1q-debt:

I

An increase in inflation expectations unjustified by fundamentals causes:

⇒

lower real interest rate

⇒

relaxation of the collateral constraint

⇒

increased debt

I Response to debt implies stronger response to inflationary pressure

Determinacy Analysis. Intuition

30y-debt:

I

An increase in inflation expectations unjustified by fundamentals causes:

⇒

lower real interest rate

⇒

relaxation of the collateral constraint

⇒

increased uptake of new loans ... but pre-existing debt is unaffected

⇒

total stock of real debt (-to-GDP) falls due to higher

inflation

I Response to debt implies weaker response to inflationary pressure

Debt and Inflation Volatility under Simple Policy Rules

0 0.5 1 1.5 2

0 0.05 0.1 0.15 0.2

φ_b/y

Std(b/y)

1q−Debt

0 0.5 1 1.5 2

0 0.02 0.04 0.06 0.08 0.1

φ_b/y

Std(π)

−20 −1.5 −1 −0.5 0

0.05 0.1 0.15 0.2

φ_b/y 30y−Debt

−20 −1.5 −1 −0.5 0

0.002 0.004 0.006 0.008 0.01

φ_b/y

Targeting Frontiers

An Estimated Medium Scale DSGE Model

I

Do the above findings generalize?

An Estimated Medium Scale DSGE Model

I

Richer model of housing and the macro economy: Iacoviello and Neri (2010)

I Housing construction sector, adjustment costs, etc.

I

Model evaluation: Estimation, likelihood comparison, key moments in data vs. model, narrative of 2000s’ boom-bust episode

I Household debt as observable (unlike Iacoviello and Neri, 2010)

I

More shocks (10)

I

Upshot of estimation:

I Estimated debt duration: 73 quarters

I AR-coefficient on ltv-shocks drops from 0.98 to 0.73

I 1q model: log data density of 6128

I 73q model: log data density of 6418 (“Decisive evidence”, Kass and Raftery, 1995)

Estimates Housing and LTV Shocks

Model Evaluation

k

1 2 3 4 5

Real debt autocorrelation0.6 0.8 1

1q Debt

Data 5th - 95th

Median k

1 2 3 4 5

0.6 0.8 1

73q Debt

Data 5th - 95th Median

k

-5 0 5

Debt-House prices correlation -0.5 0 0.5 1

k

-5 0 5

-0.5 0 0.5 1

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

% deviation from steady state -40 -20 0 20

Lending Standard Shock

1-quarter debt model 73-quarter debt model

Monetary Policy Shock - Estimated Model

0 10 20 30

0 0.05 0.1 0.15

0.2 Interest Rate

1q Debt 73q Debt

0 10 20 30

-0.06 -0.04 -0.02 0

Inflation

0 10 20 30

-0.8 -0.6 -0.4 -0.2

0 GDP

0 10 20 30

-0.6 -0.4 -0.2 0

House Prices

0 10 20 30

-1.5 -1 -0.5 0

Real Debt

0 10 20 30

-1 -0.5 0 0.5

Debt/GDP

Debt and Inflation Volatility under Simple Policy Rules - Estimated Model

φ_b/y

-2 -1 0

0 0.1 0.2

0.3 Std(b/y) φy=0.52 φy=3

φ_b/y

-2 -1 0

0 0.01 0.02 0.03

0.04 Std(π)

φ∆b

-2 0 2 4

0 0.1 0.2

0.3 Std(b/y)

φ∆b

-2 0 2 4

0 0.01 0.02 0.03

0.04 Std(π)

φ_E(b/y)

-2 -1 0

0 0.1 0.2

0.3 Std(b/y) 1y forecast 2y forecast

φ_E(b/y)

-2 -1 0

0 0.01 0.02 0.03

0.04 Std(π)

φl

0 1 2

0 0.1 0.2

0.3 Std(b/y)

φl

0 1 2

0 0.01 0.02 0.03

0.04 Std(π)

Debt-to-GDP vs. Inflation Targeting - Estimated Model

10 20 30

−2

−1 0 1 2

Nonhousing Productivity Shock

Debt/GDP

10 20 30

−0.15

−0.1

−0.05 0 0.05

Inflation

10 20 30

0 0.5 1 1.5

GDP

10 20 30

−0.8

−0.6

−0.4

−0.2 0 0.2

Intertemp Preference Shock

10 20 30

−0.05 0 0.05 0.1

10 20 30

−0.2

−0.1 0 0.1 0.2

10 20 30

−0.5 0 0.5 1 1.5

Housing Preference Shock

10 20 30

−0.05 0 0.05 0.1

10 20 30

−0.04

−0.02 0 0.02 0.04

10 20 30

−1 0 1 2 3

Lending Standards Shock

10 20 30

−0.2 0 0.2 0.4

Γ=0 Γ=1 Estimated Rule

10 20 30

−0.5 0 0.5 1 1.5

Debt-to-GDP vs. Inflation Targeting - Estimated Model

10 20 30

−0.5

−0.25 0 0.25

Housing Productivity Shock

Debt/GDP

10 20 30

−0.05

−0.025 0 0.025

Inflation

10 20 30

−0.05

−0.025 0 0.025

GDP

10 20 30

−0.4

−0.2 0 0.2

Investment Specific Shock

10 20 30

−0.05

−0.025 0 0.025 0.05

10 20 30

0 0.1 0.2 0.3

10 20 30

−0.5 0 0.5 1

Labor Supply Shock

10 20 30

−0.05 0 0.05 0.1 0.15

10 20 30

−1

−0.5 0 0.5

10 20 30

−20 0 20

Cost Shock

10 20 30

−0.1 0 0.1 0.2 0.3

Γ=0 Γ=1 Estimated Rule

10 20 30

−10

−5 0 5

Conclusion

I

A tractable model with gradual amortization process captures persistent nature of debt dynamics ` a la

I Captures the low contemporary correlation and the lead-lag relationship between debt-to-GDP and house prices

I

Policy tightening has minor, but persistent, effect on debt

I Might evenraisehouseholds’ debt-to-GDP in the short run (consistent with Svensson, 2013, Granziera and Bauer, 2016, Robstad, 2015)

I

Mechanically increasing the interest rate in response to the debt-to-GDP level causes equilibrium indeterminacy

I Opposite under 1-quarter-debt

I Destabilizes debt itself

I Responding negatively to debt-to-GDP stabilizes debt

Conclusion

I

Debt-to-GDP targeting implies

policy than inflation targeting, when the latter makes debt-to-GDP

I

Debt-to-GDP targeting implies

policy than inflation targeting, when the latter makes debt-to-GDP

⇒“Fisher Dynamics”

are key to how monetary policy should deal

with high indebtedness.

Debt-to-GDP vs. Inflation Targeting

Set

so as to minimize:

P∞ j=0β^j_l

"

(1−Γ) (1−λ_y)π_t+j² +λ_y

yt+j

y^f_t+j

2! + Γ_b

b,t+j/y_t+j b_b/y

2#

Debt-to-GDP vs. Inflation Targeting, 30y-debt

10 20 30

−0.5

−0.25 0 0.25

Inflation

10 20 30

0 0.5 1 1.5

GDP

10 20 30

0 1 2

Debt

10 20 30

−1 0 1 2

Debt/GDP

10 20 30

−1

−0.5 0 0.5

Interest Rate

10 20 30

−0.3

−0.15 0 0.15 0.3

Real Interest Rate

Γ=0 Γ=1

Frontiers Back

Debt-to-GDP vs. Inflation Targeting, 1q-debt

5 10 15 20 25 30

−4

−2 0 2

Inflation

5 10 15 20 25 30 0

0.5 1 1.5

GDP

5 10 15 20 25 30 0

2 4 6 8

Debt

5 10 15 20 25 30

−2 0 2 4 6

Debt/GDP

5 10 15 20 25 30

−4

−2 0 2

Interest Rate

5 10 15 20 25 30

−0.3

−0.15 0 0.15

Real Interest Rate

Back

Variance Frontiers and Welfare under Targeting Policies

0 0.01 0.02 0.03 0.04 0.05

0 0.001 0.002 0.003 0.004 0.005

Var(b) L1

Variance Frontier

0 0.2 0.4 0.6 0.8

0 0.001 0.002 0.003 0.004 0.005

Var(b) L1

Variance Frontier

0 0.2 0.4 0.6 0.8 1

−0.0006

−0.0004

−0.0002 0

Weight on debt

Welfare

Lender Welfare Gain λ_y=0 λ_y=0.25 λ_y=0.5

0 0.2 0.4 0.6 0.8 1

−0.0008

−0.0004 0 0.0004 0.0008

Weight on debt

Welfare

Borrower Welfare Gain Γ=1

Γ = 0.01

Γ = 0 Γ=1

Back

Estimation: Structural Parameters

Table 1: Calibrated Parameters in the Medium Scale Model

Parameter Description/Target Value

βl Steady-state annual real interest rate 3% 0.9925

βb Impatient households’ discount factor 0.97

νh Ratio of housing wealth to GDP of 1.35% 0.12

ξ Capital share in goods production 0.35

µh Capital share in housing production 0.10

µla Ratio of value of residential land to annual output of 50% 0.10 µib Ratio of business capital to annual GDP of 2.1% 0.10 δh Ratio of residential investments to total output of about 6% 0.01 δkc Ratio of nonresidential investments to GDP of about 27% 0.025 δkh Ratio of nonresidential investments to GDP of about 27% 0.03

X,Xwc,Xwh Steady-state mark-up of 15% 1.15

e

m=Rbb/qhb Steady-state ratio of debt to real estate 0.50

m Loan-to-value ratio on new mortgages 0.85

ρs Annual autocorrelation of trend inflation around 0.9 0.975 Notes: All parameter values follow from Iacoviello and Neri (2010).

Table 2: Estimation: Prior and Posterior Distribution of the Structural Parameters Prior distribution Posterior distribution

1-quarter debt model Long-term debt model

Parameter Distribution Mean SD Median 90% HPD Median 90% HPD

γl Beta 0.5 0.075 0.29 0.22 – 0.36 0.26 0.20 – 0.32

γb Beta 0.5 0.1 0.42 0.31 – 0.55 0.51 0.41 – 0.62

ϕL,l Gamma 0.5 0.1 0.39 0.27 – 0.53 0.42 0.30 – 0.51

ϕL,b Gamma 0.5 0.1 0.54 0.38 – 0.70 0.48 0.34– 0.71

µl Normal 1 0.1 -0.05 -0.08 – -0.02 -0.05 -0.08 – -0.03

µb Normal 1 0.1 1.18 1.02 – 1.31 1.12 0.96 – 1.31

φk,c Gamma 10 2.5 20.14 17.09 – 23.29 20.85 18.45 – 23.57

φk,h Gamma 10 2.5 10.60 6.76 – 15.02 9.58 7.03 – 12.57

$ Beta 0.65 0.05 0.65 0.57 – 0.73 0.62 0.56 – 0.69

φR Beta 0.75 0.1 0.61 0.55 – 0.66 0.63 0.57 – 0.68

φπ Normal 1.5 0.1 1.42 1.32 – 1.51 1.40 1.31 – 1.50

φy Normal 0 0.1 0.56 0.46 – 0.65 0.52 0.44 – 0.68

θ Beta 0.667 0.05 0.89 0.87 – 0.91 0.89 0.87 – 0.91

υ Beta 0.5 0.2 0.52 0.41 – 0.65 0.55 0.45 – 0.66

θw,c Beta 0.667 0.05 0.77 0.73 – 0.81 0.76 0.72 – 0.80

ιw,c Beta 0.5 0.2 0.08 0.02 – 0.15 0.07 0.02 – 0.14

θw,h Beta 0.667 0.05 0.77 0.72 – 0.81 0.75 0.72 – 0.81

ιw,h Beta 0.5 0.2 0.40 0.21 – 0.60 0.42 0.23 – 0.61

ζ Beta 0.5 0.2 0.78 0.66 – 0.91 0.80 0.68 – 0.92

δ Normal^∗ 0.10 0.02 1 – 0.0307 0.0223 – 0.0412

Log data density 6131.05 6415.67

Notes: The median implied value ofϑis0.59in the 1-quarter debt model, and0.042in the long-term debt model.^∗The prior distribution forδrefers only to the long-term debt model becauseδ= 1with 1-quarter debt.

The sample is 1965q1 to 2014q1.

31 Back

Estimation: Shock Processes

Table 3: Estimation: Prior and Posterior Distribution of the Shock Processes Prior distribution Posterior distribution

1-quarter model Long-term debt model Parameter Distribution Mean SD Median 90% HPD Median 90% HPD

ρz Beta 0.8 0.1 0.95 0.93 – 0.97 0.96 0.94 – 0.98

ρAH Beta 0.8 0.1 0.996 0.991 – 0.999 0.996 0.992 – 0.999

ρAK Beta 0.8 0.1 0.92 0.90 – 0.95 0.93 0.90 – 0.95

ρvh Beta 0.8 0.1 0.97 0.95 – 0.99 0.98 0.96 – 0.99

ρc Beta 0.8 0.1 0.96 0.86 – 0.99 0.96 0.95 – 0.99

ρνl Beta 0.8 0.1 0.97 0.95 – 0.99 0.97 0.95 – 0.99

ρm Beta 0.8 0.1 0.98 0.96 – 0.99 0.78 0.68 – 0.87

σz Inv. Gamma 0.001 0.01 0.0100 0.0091 – 0.0110 0.0100 0.0091 – 0.0110 σAH Inv. Gamma 0.001 0.01 0.0213 0.0195 – 0.0233 0.0216 0.0198 – 0.0236 σAK Inv. Gamma 0.001 0.01 0.0107 0.0089 – 0.0126 0.0111 0.0096 – 0.0127 σνh Inv. Gamma 0.001 0.01 0.0382 0.0271 – 0.0508 0.0335 0.0237 – 0.0452 σR Inv. Gamma 0.001 0.01 0.0032 0.0027 – 0.0037 0.0030 0.0027 – 0.0034 σc Inv. Gamma 0.001 0.01 0.0123 0.0047 – 0.0288 0.0122 0.0078 – 0.0185 σνl Inv. Gamma 0.001 0.01 0.0196 0.0161 – 0.0236 0.0192 0.0157 – 0.0233 σp Inv. Gamma 0.001 0.01 0.0039 0.0035 – 0.0044 0.0039 0.0035 – 0.0044 σs Inv. Gamma 0.001 0.01 0.0280 0.0211 – 0.0348 0.0276 0.0216 – 0.0339 σm Inv. Gamma 0.001 0.01 0.0180 0.0165 – 0.0196 0.1069 0.0764 – 0.1368 σL,h Inv. Gamma 0.001 0.01 0.1647 0.1511 – 0.1793 0.1624 0.1495 – 0.1787 σω,h Inv. Gamma 0.001 0.01 0.0051 0.0047 – 0.0056 0.0050 0.0047 – 0.0056

Notes:σL,handσω,hare standard deviations for measurement errors in hours worked and wages in the housing sector. The sample is 1965q1 to 2014q1.

Table 4: Variance Decomposition Non-

house prod.

Mon.

pol.

House prod.

House pref.

Inv.

spec.

prod.

Cost Infl.

target Labor supply

Intert.

Pref.

Lend.

std.

GDP 20.88 3.57 2.62 0.41 8.04 3.80 3.55 55.77 1.35 0.01

Consumption 24.39 2.76 0.15 0.19 3.50 3.52 3.34 59.55 2.59 0.01

Inflation 1.90 1.74 0.05 0.16 0.65 17.58 70.20 1.05 6.55 0.12

Residential inv. 0.28 0.78 67.32 18.49 0.04 0.14 0.19 10.31 2.43 0.01 Business inv. 14.63 4.11 0.05 0.04 33.05 4.52 4.08 30.39 9.04 0.09 Hours cons. 1.68 6.30 0.04 0.04 0.59 6.85 5.12 79.04 0.32 0.03 Hours housing 0.48 1.96 24.23 42.23 0.07 0.34 0.50 24.73 5.43 0.03 House prices 1.62 0.28 90.16 5.97 0.22 0.29 0.18 0.71 0.57 0.00 Interest rate 2.26 5.67 0.17 0.39 3.03 4.10 68.66 2.35 13.09 0.28 Wages cons. 1.77 6.60 0.08 0.17 1.52 1.38 68.46 12.98 6.93 0.13 Wages housing 1.97 5.97 0.05 0.17 1.45 2.18 66.53 14.23 7.29 0.15 Househ. debt 1.96 1.26 2.37 31.84 0.62 2.98 5.86 7.41 6.05 39.66 Notes: Long-run variance decomposition from the estimated model with long-term debt.

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Credit and Housing Shocks - Estimated Model

When does debt duration matter if monetary policy does not react to debt?

0 10 20 30

Housing preference shock 0 1 2

3 Real Debt

1q Debt 73q Debt

0 10 20 30

Housing productivity shock -2 -1 0

0 10 20 30

Lending standards shock 0 2 4

0 10 20 30

-0.1 -0.05 0

Lenders' Consumption

0 10 20 30

-0.1 -0.05 0

0 10 20 30

-0.1 -0.05 0 0.05

0 10 20 30

-0.2 0 0.2

Borrowers' Consumption

0 10 20 30

-0.4 -0.2 0 0.2

0 10 20 30

-0.2 0 0.2

0 10 20 30

-0.05 0

Aggregate Consumption

0 10 20 30

-0.1 -0.05 0

0 10 20 30

-0.05 0 0.05 0.1

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