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Macroeconomic Shocks, Housing Market and Banks’ Performance in Venezuela

Carvallo, Oscar and Pagliacci, Carolina (2013): Macroeconomic Shocks, Housing Market and Banks’ Performance in Venezuela.

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Abstract

Which structural macroeconomic shocks have typified rising house prices? What ultimate factors have compromised financial stability and risk? These questions are answered for the Venezuelan economy by estimating a FAVAR model with macroeconomic, banking and asset price variables. We find that real house prices only respond to demand shocks occurring at aggregate or sectorial level. Most significant house price growths also take place with greater financial exposure to mortgages and real domestic currency depreciations, two factors that potentially magnify rising house prices. Monetary expansions from fiscal origin also increase house prices. In terms of banks’ performance, we find that credit is directed toward firms for expansionary supply shocks, but toward household spending, on goods or housing, for expansionary demand shocks. In all these cases, banking leverage increases, but mainly when shocks have a significant effect on output. Rising risk and financial instability stem from the combination of growing interest rates and domestic currency appreciation, two events that provide incentives for banks to re-arrange portfolio allocation at the cost of a higher volatility of returns. Increasing risk seems to be strongly conditioned by abrupt reductions in banks’ liabilities.

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