Gertjan W. Vlieghe

House Prices, Consumption, and Monetary Policy: A Financial Accelerator Approach

We consider a general equilibrium model where asymmetric information problems create frictions in credit markets used by households. In our economy, houses serve as collateral to lower the agency costs related to borrowing. We show that this amplifies the effect of monetary policy shocks on housing investment, house prices and consumption. We consider the effect of a structural change in credit markets that lowers the transaction costs of additional borrowing against housing equity. We show that such a change would increase the effect of monetary policy shocks on consumption, but would decrease the effect on house prices and housing investment.

Indicators of Fragility in the UK Corporate Sector

The determinants of the aggregate corporate liquidation rate in the United Kingdom are estimated from a sample of quarterly data using an autoregressive distributed lag (ARDL) approach which allows for non-stationarity of the variables. The paper investigates what the appropriate measures of indebtedness are, and examines whether the unprecedented spike in the corporate liquidation rate in the United Kingdom in 1992 caused a breakdown in the relationship between the variables. The debt-to-GDP ratio, the real interest rate, deviations of GDP from trend and real wages are found to be long-run determinants of the liquidation rate. The birth rate of new companies, an index of property prices and nominal interest rates have significant short-term effects. The estimated equation is robust to changes in the sample period. The rapidly increasing level of indebtedness in the late 1980s was the main determinant of the subsequent increase in the liquidation rate. The decrease in the liquidation rate after 1992 was primarily due to lower real interest rates, lower real wages and the cyclical recovery of GDP.

Imperfect credit markets: implications for monetary policy

I develop a model for monetary policy analysis that features significant feedback from asset prices to macroeconomic quantities. The feedback is caused by credit market imperfections, which dynamically affect how efficiently labour and capital are being used in aggregate. I then analyse what implications this mechanism has for monetary policy. The paper offers three insights. First, the monetary transmission mechanism works not only via nominal rigidities but also via a reallocation of productive resources away from the most productive agents. Second, following an adverse productivity shock there is a dynamic trade-off between the immediate fall in output, which is an efficient response to the productivity fall, and the fall in output thereafter, which is caused by a reallocation of resources away from the most productive agents. The more the initial output fall is dampened with a temporary rise in inflation, the more the adverse future effects of the reallocation of resources are mitigated. Third, in a full welfare-based analysis of optimal monetary policy I show that it is optimal to have some inflation variability, even if the only shocks in the economy are productivity shocks. The optimal variability of inflation is small, but the costs of stabilising inflation too aggressively can be large.