House-Price Crash and Macroeconomic Crisis: A Hong Kong Case Study

Zhang, Tongbin and Hu, Bo (2011): House-Price Crash and Macroeconomic Crisis: A Hong Kong Case Study.

Abstract

House prices crash has become an important feature of macroeconomic crisis. We argue that house prices crash driven by contractionary monetary policy is not only a reaction to crisis, but also accelerates and amplifies the fluctuations of major macroeconomic variable. In this paper, we conduct a case study of Hong Kong in the 1997-1998 financial crisis and quantitatively analyze the mechanism by developing a general equilibrium model incorporating financial accelerator mechanism into both household and entrepreneur sectors. After estimating and simulating the model, impulse response results imply that our model can explain the co-movement of house prices, consumption, and investment better than the alternative models.

• Item Type: MPRA Paper
• Language: English
• Keywords: house prices, fianncial accelerator, consumption, investment, Hong Kong
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

References

[1] Aoki, Kosuke., James Proudman, and Gertjan Vlieghe. 2004. "House Price, Consumption ,and Monetary Policy: a Financial Accelerator Approach." Journal of Financial Intermediation, 13(4), 414-435.

[2] Bernanke, B., and Mark Gertler. 1989. "Agency Costs, Net Worth, and Business Fluctuations." American Economic Review, 79(1), 14-31.

[3] Bernanke B, and Mark Gertler. 1995. "Inside the Black Box: the Credit Channel of Monetary Transmission." Journal of Economic Perspectives, 9(4), 27---48.

[4] Bernanke, B., M. Gertler, and S. Gilchrist. 1999. "The Financial Accelerator in a Quantitative Business Cycle Framework.", The Handbook of Macroeconomics 1C, pp.1341-1393, Amsterdam, North Holland.

[5] Blanchard, Olivier., and Charles M. Kahn. 1980. "The Solution of Linear Difference Models under Rational Expectation." Econometrica, 48(5), 1305-1311.

[6] Calvo, G. 1983. "Staggered Prices in a Utility-maximizing Framework." Journal of Monetary Economics, 12(3), 383-398.

[7] Campbell, J., and Gregory Mankiw. 1989. "Consumption, Income, and interest rates: Reinterpreting the Time Series Evidence." NBER Macroeconomics Annual, 4, 185-216.

[8] Canova, Fabio. 2007. "Method For Applied Macroeconomic Research." Princeton University Press.

[9] Carlstrom, C.T., and T.S. Fuerst. 1997. "Agency Costs, Net worth, and Business Fluctuations: a Computable General Equilibrium Analysis." American Economic Review, 87(5), 893-910.

[10] Case, K.E., and R.J. Shiller. 1998. "The Behavior of Home Buyers in the Boom and Post Boom Market." New England Economic Review, November/December, 29-46.

[11] Cespedes, L., R. Chang, and A. Velasco. 2004. "Balance Sheets and Exchange Rate Policy." American Economic Review, 94(4), 1183-1193.

[12] Chau, K.W., S.K. Wong, C.Y. Yiu, and H.F. Leung. 2005. " Real Estate Price Indices in Hong Kong." Journal of Real Esatate Literature, 13(3), 337-356.

[13] Christiano, Lawrence., Martin Enichenbaum and Charles Evans. 1999. "Monetary Policy Shocks: What We Have Learned and to What End." The Handbook of Macroeconomics 1A, pp.65-148, Amsterdam, North Holland.

[14] Davis, Morris., and Michael Palumbo. 2008. "The Price of Residential Land in Large U.S. Cities." Journal of Urban Economics, 63(1), 352-384.

[15] Dejong, David N., and Chaten Dave. 2007. "Structural Macroeconometrics." Princeton University Press.

[16] DiPasquale, D., and W.C. Wheaton. 1992. "Housing Market Dynamics and the Future of Housing Price." Journal of Urban Economics, 35(1), 1-27.

[17] Gali, Jordi. 2008. "Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework." Princeton University Press.

[18] Gertler, Mark., Simon Gilchrist, and Fabio Natalucci. 2007. "External Constraints on Monetary Policy and the Financial Accelerator." Journal of Money Credit and Banking, 39(2-3), 295-330.

[19] Gottlied, M. 1976. "Long Swings in Urban Development." Columbia University Press.

[20] Iacoviello, Matteo. 2004. "Consumption, House Price, and Collateral Constraints: a Structural Econometric Analysis", Journal of Housing Economics, 13(4), 304-320.

[21] Iacoviello, Matteo. 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle." American Economic Review, 95(3), 739-764.

[22] Iacoviello, Matteo., and Stefano Neri. 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model." American Economic Journal: Macroeconomics, 2(2), 125-64.

[23] Jermann, U., and V. Quadrini. 2009. "Macroeconomic Effects of Financial Shocks." American Economic Review, forthcoming.

[24] Kiyotaki, N. and J. Moore. 1997. "Credit Cycles." Journal of Political Economy, 105(2), 211-248.

[25] Kiyotaki, N., A. Michaelides, and K. Nikolov. 2011. "Winners and Losers in Housing Markets." Journal of Money, Credit and Banking, 43(2), 255-296.

[26] Krugman, Paul. 1999. "The Return of Depression Economics." W.W Norton Company.

[27] Krugman, Paul. 1998. "What Happened to Asia." http://web.mit.edu/krugman/.

[28] Li, Wenli., and Rui Yao. 2007. "The Life Cycle Effects of House Price Changes." Journal of Money Credit and Banking, 39(6), 1375-1409.

[29] Liu, Zheng., Pengfei Wang and Tao Zha. 2011. "Land-Price Dynamics and Macroeconomic Fluctuations." Federal Reserve Bank of Atlanta Working Paper Series.

[30] Monacelli, Tommaso. 2009. "New Keynesian Models, Durable Goods, and Collateral Constraints." Journal of Monetary Economics, 56(2), 242-254.

[31] Ortalo-Magne, Francois and Sven Rady. 2006. "House Markets Dynamics: On the Contribution of Income Shocks and Credit Constraints." Review of Economic Studies, 73(2), 459-485.

[32] Peng, Ruijue., and William Wheaton. 1994. "Effects of Restrictive Land Supply on Housing in Hong Kong: An Econometric Analysis", Journal of Housing Research, 5(2), 263-292.

[33] Quigley, John. 1999. "Real Estate Price and Economic Cycles." International Real Estate Review, 2(1), 1-21.

[34] Quigley, John. 2001. "Real Estate and the Asian Crisis." Journal of Housing Economics, 10(2), 129-161.

[35] Radelet, Steven. and Jeffery Sachs. 1998. " The East Asian Financial Crisis: Diagnosis, Remedies, Prospect." Brookings Papers on Economic Activity, No.1, 1-90.

[36] Sarno, Lucio., and Mark Taylor. 1999. "Moral Hazard, Asset Price Bubbles, Capital Flows and the East Asian Crisis: the First Test." Journal of International Money and Finance, 18(4), 637-657.