Activos hipotecables y politica monetaria.

AuthorArango, Mauricio
PositionTexto en ingles
Pages155(31)

Collateralized Assets Prices and Monetary Policy *

Ativos Hipotecaveis e Politica Monetaria

Introduction

The 2008 financial crisis has reinforce the idea that the financial system has a considerable impact on the economic cycle and that a strong and sustained recovery must on a solid financial system. Nevertheless, recovery has been slow and highly expansive fiscal and monetary policies have done little to improve this. Credit recovery has become one of the main concerns of politicians, as expressed by the chairman of the Federal Reserve (FED), Ben S. Bernanke, in his declaration on June 7, 2012:

The depressed housing market has also been an important drag on the recovery. Despite historically low mortgage rates and high levels of affordability, many prospective home buyers cannot obtain mortgages, as lending standards have tightened and the creditworthiness of many potential borrowers has been impaired. The behavior described in Bernanke's declaration has no precedent in the last two decades, as shown in figure 1. It also summarizes most of the purpose of this paper which is to develop a theoretical model that shows how changes in collateral constraints caused by both changes in the price of collateral and the cautious behavior of the banks can diminish monetary policy effectiveness by breaking the credit channel.

This slump in household credit has been one of the main reasons why the economic recovery has been slower than usual--similar references are found in Miller and Stiglitz (2010) Diamond and Rajan (2009), Mishkin (2009), Taylor (2009), and Brunnermeier (2008)--. As shown in figure 2, (1) the US unemployment rate has never remained over 7% for very long in the last two decades. This implies a lower income for households and, therefore, lower consumption and welfare.

Nevertheless, this type of co-movement between the credit and economic cycle is far from new. Aliaga-Diaz and Pia (2010)--see also: Reinhart and Rogoff (2009), Bordo (2008) and Mendoza and Terrones (2008)--have found evidence in line with this by proving the counter-cyclical behavior of interest rates. This implies that during crisis, credit is less accessible (due to higher interest rates), reducing investment and worsening the recession.

The connection between credit and the economic cycle is closely related to what is referred to in the literature as the "credit crunch" and "financial accelerator". These two terms are often used to explain the effect of the financial system in economic crisis. The credit crunch refers to a significant reduction in credit supply; the financial accelerator has been explained as the amplification of initial shocks due to changes in the credit market.

Bernanke and Lown (1991) mention a set of arguments that could explain the credit crunch in the US 1990 crisis. Among the many reasons offered by the authors, "overzealous regulation" and "credit demand and borrowers' balance sheets" fit quite well into the events of the last six years--even though the authors did not choose the aforesaid as the main factors for the 1990s credit crunch--. The former refers to a strict behavior from banks during the economic crisis in order to reduce risky credit that could lead to loan losses. This kind of behavior directly downsizes credit. The second point argues that during crisis, credit demand slows down. One of the many reasons for it is the weakening of borrowers' balance sheets, which is affected by lower prices. The latter argument becomes more relevant after the most recent crisis. As shown in figure 3, real house prices have been constantly decreasing since the outbreak of the subprime crisis.

As shown by Arango et al. (2011), one of the reasons that could induce an economic crisis after the bursting of a price bubble is a protracted underpricing of goods used as collateral, particularly land prices. This phenomenon reduces collateral for a long period, increasing the length and seriousness of the credit crunch.

Using some recent developments from the Dynamic Stochastic General Equilibrium (DSGE) literature on the housing market, this paper develops a DSGE model that explains how a financial system's collateral constraint can amplify negative economic shocks in an expansive monetary environment, reducing monetary policy impact on the economic activity.

A word on the limitations of this research is due. This manuscript limits its analysis of monetary policy to the use of the interest rate instrument. As such no-conventional monetary policy, like the ones observed in the United States and Europe in the aftermath of the 2008 crisis, are beyond the scope this paper and subject matter for further research. In this sense, the effectiveness of the monetary policy is defined as the impact of interest rates on economic activity, especially on production, since the model presented in this manuscript includes prices, along with some rigidities on the price setting process (sticky prices), but no shocks on inflation.

  1. Credit Crunch and Financial Accelerator

    A credit crunch has usually been thought of as a consequence of economic downturns instead of a cause of economic fluctuations. One of the consequences of a financial system is the presence of larger fluctuations due to the monetary accelerator. The seminal work of Bernanke et al. (1996) refers to two complementary characteristics of the financial accelerator: the amplification of initial shocks and its propagation. The main reason behind these two consequences is the worsening of the financial conditions of the agent. In particular, a flight to quality reduces access to the financing of the most vulnerable agents in the economy, restraining their capacity to smooth consumption.

    Bernanke and Gertler (1989) illustrate some of the financial accelerator effects by showing how Real Business Cycle (RBC) fluctuations can reduce cash flow to borrowers, and later through investment, to the rest of the economy, which generates a vicious cycle that amplifies the effect of the initial shock and prolongs it to the following periods.

    Greenwald and Stiglitz (1993) reached a similar conclusion using a model where companies can only operate with debt. They found that a company whose access to financing reduced suffers a decrease in its production and profits, which in turn induces a decline in income to the rest of the economy. Gertler (1992) and Aghion and Bolton (1997), among other authors, found the same effects with different models.

    Bernanke et al. (1998) mention information asymmetries to be one of the main reasons for the financial accelerator. They also cite agency costs and the fact that, under credit market frictions, borrowers' finance premiums depend inversely on their wealth, reinforcing the conclusion that an exogenous reduction of household income restrains access to credit.

    In line with Bernanke et al. (1998), Aoki et al. (2004) present a model with frictions in the credit market that includes housing services as part of consumption. They found that a positive shock in the economy increases the demand for houses and, therefore, house prices rise, which in turn improves house owners' net worth, allowing them to borrow more money, increasing the demand for houses even further.

    Considering a different perspective, Kiyotaki and Moore's (1997) seminal paper introduces a collateral constraint for borrowing, describing a different crisis propagation mechanism through credit. In this type of model, crisis generates a decrease in the price of any goods used as collateral, causing a reduction in borrowing capacity; therefore, lower spending.

    The Kiyotaki and Moore's set up has been widely used in more recent papers, such as Kocherlakota (2000), Monacelli (2009), Iacoviello (2005), Calza et al. (2009), Brzoza-Brzezina and Makarski (2011), and Arango et al. (2011), among others, due to the recent surge on interest in the relationship between credit and the price of goods used as collateral. Most of these papers use New Keynesian DSGE models that illustrate how the financial system can amplify the initial effect of productivity or monetary policy shock. Many of those models relay on Calvo (1983) pricing set up in order to simulate the effect of the price of durable goods on a collateral constraint.

    Most of the literature after Kiyotaki and Moore's paper has taken collateral constraint as an exogenous term. Brzoza-Brzezina and Makarski (2011) go further on this, presenting a DSGE model that introduces a credit constraint that, in an exogenous way, becomes more restrictive and in turn causes a credit crunch.

    In the same vein of the financial accelerator literature, this paper describes a model where financial markets amplify economic shocks. Other important studies for the development of this paper are referenced below. Nevertheless, the literature on the credit-market is vast, and the review presented here is far from being a complete survey. Bernanke et al. (1996; 1998) can be referenced for further consultation.

  2. The Price Bubble

    Wrong pricing is not an idea with which many economists feel comfortable. Nevertheless, price bubbles are mostly related to this term. The last us crisis was an example of incorrect pricing, as reported in various journals: "We economists were wrong: Even when traders in an asset market know the value of the asset, bubbles form dependably. Bubbles can arise when some agents buy not on fundamental value, but on price trend or momentum" (Gjerstad & Smith, 2009).

    Bubbles don't spring from nowhere. They're...

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