Household finance, housing, and monetary policy

Abstract

Household finance has been known to be a challenging research area in economics due to difficulties in measuring household behavior and the numerous unpredictable conditions each household faces, such as borrowing constraints and uninsurable income. This dissertation studies how the household consumption behavior has been changed along with the housing market and monetary policy shocks. In Chapter one, the big events and changes that have had huge impacts on consumer finance are presented in chronological order and results from them are examined based on the literature. Tax policies, monetary policies, housing policy and housing markets, and mortgages are chosen as topics that have affected consumer finance and are related to the rest of chapters. Chapter two finds a dynamic linkage between household consumption expenditures and housing prices based on the structural breaks and how the relation has changed along with structural changes. By employing two structural equations, it is tested that any detected structural breaks in relation between housing prices and household consumption appears to make changes in consumer's behaviors. The estimated break dates are 1982Q2 and 1981Q4 with consumer credit from two structural equations. When the mortgage debt is included in the equation, estimated break dates are 2013Q2 and 2013Q1 from each structural equations. This result is in line with the big tax cut in 1981 and housing price crash in 2012 mentioned in the chapter one. Before the 1982Q2, the predictive powers of interest rate and consumer credit for consumption appear. The mortgage debt is statistically significant to explain the total personal consumption expenditures after 2013Q1 which is close to the structural breaks in the volatility of housing price, 2011Q1 where housing prices were the lowest. Thus, this paper finds the apparent evidence of changes in consumption behaviors after the break dates. In chapter three, I use a structural VAR using Gibbs sampling with sign restrictions estimated on quarterly data to investigate the impulse response of households' assets and credits in balance sheets to a monetary policy shock. This paper studies if households may change their consumption behaviors or adjust their portfolios when the value of assets in households' balance sheet changes unexpectedly and borrowing constraints change due to a monetary policy shock. In other words, changes would be expected in the composition of asset portfolios and balance sheets through the credit market after a monetary policy shock. Results show that the reaction of PCE was positive and kept its positive impact for quite a long period, which supports the idea that households do not cut their spending after a monetary policy shock. Also, financial wealth showed a negative impact on the impulse response function. This is consistent with the basic schematic suggested by Elbourne (2008) and added the possibility that households rebalanced their portfolios after a shock rather than cut their expenditures.