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Consumption, housing collateral and the Canadian business cycle

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  • Ian Christensen
  • Paul Corrigan
  • Caterina Mendicino
  • Shin-Ichi Nishiyama

Abstract

How important are collateral constraints for reproducing salient features of the data? To address this question, we estimate two nested versions of a New Keynesian model: one with collateralized household debt and the frictionless version of the same model. Both versions of the model are fit to Canadian data using Bayesian methods. We argue that the presence of collateral constraints improves the performance of the model in terms of overall goodness of fit. Housing collateral helps to generate a positive correlation between consumption and house prices. Moreover, housing collateral induced spillovers boosted consumption growth during the housing market boom-bust cycles of the late 1980s and early 2000s.

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  • Ian Christensen & Paul Corrigan & Caterina Mendicino & Shin-Ichi Nishiyama, 2016. "Consumption, housing collateral and the Canadian business cycle," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 207-236, February.
    • Handle: RePEc:cje:issued:v:49:y:2016:i:1:p:207-236
    DOI: 10.1111/caje.12195
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    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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