What happens during recessions, crunches and busts?

We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles, for 21 OECD countries over the period 1960–2007. In particular, we analyse the implications of 122 recessions, 113 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 245 (61) episodes of equity price declines (busts), and their various overlaps in these countries, over the sample period. Our results indicate that the interactions between macroeconomic and financial variables can play a major role in determining the severity and duration of a recession. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions.
— Stijn Claessens, M. Ayhan Kose and Marco E. Terrones     

Regional UK house price co-movement

ABSTRACT

Cyclical synchronization of home prices has important implications for monetary (and other) policies. Regional house price divergence, even over a business cycle, can inhibit labour mobility and prevent workers from moving to where they could add most to their own wages and overall growth. We study house price co-movement across the different UK regions with a method, that, unlike previously employed techniques, allows for time-varying estimates. We find first, that the UK exhibits more home price divergence compared to previously reported results for the US. Second, regions near London exhibit the most co-movement, and those further from London the most divergence. Third, London itself is in the ‘middle of the pack’ in terms of synchronization compared to other regions. This may reflect London’s status as a ‘global city’ and being the destination for housing demand from sources abroad. Lastly, segmentation has clearly been increasing, rather than decreasing in recent years.     

Oil Price Shocks and the Asymmetric Adjustment of UK Output: A Markov-switching approach

This paper examines the role played by real oil price shocks in influencing the growth in UK GDP. Our particular interest is the possibility that asymmetries might exist in such a relationship. Using Hamilton's regime-switching estimation, we consider whether oil price shocks influence both the deepness and duration of the business cycle. We find that asymmetries arise insofar as oil price appreciation is most likely to curtail the duration of the expansionary phase of the business cycle. This result is in contrast to existing studies of the oil price-macroeconomy relationship that have largely concerned the US.     

The Australian Business Cycle: Joe Palooka or Dead Cat Bounce?

We address the question of whether asymmetry in the business cycle and asymmetry in the persistence of negative versus positive shocks characterises Australian output growth. Using nonlinear time series models we provide some evidence consistent with the idea that Australian output growth is characterised by three distinct phases: contractions, high-growth recovery periods and 'normal' or moderate growth periods. This implies that Australian output fluctuations have a significant transitory component and is supportive of the 'output-gaps' view and 'plucking' model view of economic fluctuations. In contrast to recent evidence for the US and Canada however, we find that Australian GDP growth does not exhibit important asymmetries in the responses of output growth to positive and negative shocks.     

Convergence and spillover of house prices in Chinese cities

The issue of house price convergence in 34 Chinese cities is investigated. We augmented the convergence model with contemporaneous spatial dependence in house prices and found that price convergence and positive spatial spillover are both present. We explicitly addressed the endogeneity problem by introducing a Bayesian instrumental variable setup, which was estimated with particle filtering techniques. From a growth poles perspective, the empirical evidence indicates that the spread effect in regional house prices outweighs the backwash effect. The identified positive spatial spillover has two effects on the growth of house prices in Chinese cities. First, the spillover elevates the trajectories of the steady-state growth paths of house prices. Second, the spillover narrows the gaps between the growth paths of house prices in neighbouring cities. Shocks to the socio-economic variables of a city generate their own effects on domestic house prices that dominate the effects arising from cross-city price feedbacks, thus mitigating the prospect of level convergence. Our findings also suggest a collaborating role between time and spatial dependence parameters. The identification of inter-city spillover, which is a conditioning factor for regional house price convergence, offers implications to policies that are most likely to be effective in reducing regional disparity.     

Has the structural break slowed down growth rates of stock markets?

In this paper, we use the common structural break test suggested by Bai et al. (1998) to test for a common structural break in the stock prices of the US, the UK, and Japan. On the basis of the structural break, we divide each country's stock price series into sub-samples and investigate whether or not the structural break had slowed down the growth of stock markets. Our main findings are that when stock markets are modelled in a trivariate sense the common structural break turns out to be 1990:02, with the confidence interval including several episodes, such as the asset price bubble when housing prices and stock prices in Japan reached a peak in 1988/1989, the early 1990s recession in the UK, the business cycle peak of July 1990, the August 1990 Iraqi invasion of Kuwait and the March 1991 business cycle trough. Annual average growth rates suggest that the structural break has slowed down the growth rate of the US, the UK and Japanese stock markets.     

Saving up or settling down: Home ownership over the life cycle

In a Bewley model with endogenous price volatility, home ownership and mobility across locations and jobs, we assess the contribution of financial constraints, housing illiquidities and house price risk to home ownership over the life cycle. The model can explain the rise in home ownership and fall in mobility over the life cycle. While some households rent due to borrowing constraints in the mortgage market, factors that affect propensities to save and move, such as risky house values and transactions costs, are equally important determinants of the ownership rate.     

Entry of painters in the Amsterdam market of the Golden Age

We analyze the evolution of the entry of painters and price of paintings in the XVII century Amsterdam art market. In line with evolutionary theory, demand-driven entry in the market was first associated with product innovations and a rapid increase in the number of painters. After reaching a peak, the number of painters started to decrease in parallel with a price decline and the introduction of process innovations. To test for the role of profitability in the art market as a determinant of endogenous entry of painters, we build a price index for the representative painting inventoried in Dutch houses. This is based on hedonic regressions controlling for characteristics of the paintings (size, genre, placement in the house), the owners (job, religion, value of the collection, size of the house) and the painters. After a peak at the beginning of the century, the real price of paintings decreased until the end of the century. We provide anecdotal evidence for which high initial prices attracted entry of innovators, and econometric evidence on the causal relation between price movements and entry.     

Fertility and housing

Young households in Hong Kong face particularly steep increases in house prices and low fertility despite low gender wage gaps. The model of fertility and housing in this paper explains why fertility decline need not reverse as female wages rise relative to male wages where housing land is scarce. For given house prices, demand for children may rise with female relative wages if housing comprises a sufficiently large share of childrearing. If the user cost of housing falls with rising house prices then fertility also rises. For endogenous house prices, however, growth in wages and a burgeoning working age population raises the market price of housing. In turn, fertility no longer rises with female relative wages. The analysis provides a novel mechanism whereby high population support ratios depress fertility and the results fit recent evidence that house prices affect fertility.     

Investigating regional house price convergence in the United States: Evidence from a pair-wise approach

In this paper we examine long-run house price convergence across US states using a novel econometric approach advocated by Pesaran (2007) and Pesaran et al. (2009). Our empirical modelling strategy employs a probabilistic test statistic for convergence based on the percentage of unit root rejections among all state house price differentials. Using a sieve bootstrap procedure, we construct confidence intervals and find evidence in favour of convergence. We also conclude that speed of adjustment towards long-run equilibrium is inversely related to distance.     

Bubbles in UK house prices: evidence from ESTR models

Recent movements in stock and house prices have led to an examination of the presence of bubbles. Whilst, there is extensive research on stock price data, there is relatively less for house prices. This paper uses a present‐value model for house prices to test for the presence of bubbles. The results support the presence of a non‐fundamental component within UK national and regional house prices. In particular, for the majority of series considered, evidence is presented of linear non‐stationarity within the fundamental present‐value relationship, and of non‐linear stationarity, implying the presence of a non‐fundamental, or bubble, component. Furthermore, evidence is presented that prices adjust quicker when they are below fundamental equilibrium, than when they are above fundamental equilibrium, i.e. there is downward price stickiness. These results support the hypothesis that house price dynamics can be characterised by price‐to‐price momentum. Finally, forecast evidence suggests that real prices are likely to adjust downwards and converge with fundamental value.     

The effect of monetary policy on real house price growth in South Africa: A factor-augmented vector autoregression (FAVAR) approach

This paper assesses the impact of monetary policy on real house price growth in South Africa using a factor-augmented vector autoregression (FAVAR), estimated using a large data set comprising of 246 quarterly series over the period 1980:01 to 2006:04. The results based on the impulse response functions indicate that, in general, house price inflation responds negatively to monetary policy shock, but the responses are heterogeneous across the middle-, luxury- and affordable-segments of the housing market. The luxury-, large-middle- and medium-middle-segments are found to respond much more than the small-middle- and the affordable-segments of the housing market. More importantly, we find no evidence of the home price puzzle, observed previously by other studies that analyzed house prices using small-scale models. We put this down to the benefit gained from using a large information set.     

Oil price uncertainty and the business cycle: Accounting for the influences of global supply and demand within a VAR GARCH-in-mean framework

ABSTRACT

This article reinvestigates the influence of oil price uncertainty on real economic activity in the United States using a four-variable VAR GARCH-in-mean asymmetric BEKK model. In contrast to previous studies in this area, the analysis focuses on business cycle fluctuations and we control for global supply and demand factors that might affect the real price of oil, its volatility as well as the US economy. We find that – even after accounting for these factors – oil price uncertainty still has a highly significant negative influence on the US business cycle. Our computations show that the effect is economically important during several periods, mostly after a significant variance shift in the mid-1980s. We simultaneously estimate the effect on the global business cycle but find that it is comparatively weak. Finally, significant spillover effects in the GARCH model suggest that oil price volatility is a gauge and channel of transmission of more general macroeconomic shocks and uncertainty. These linkages are particularly strong in case of unexpected bad news.     

Global capital markets,housing prices,and partisan fiscal policies

In recent years, global imbalances have channeled the excess savings of surplus countries toward the real estate markets of deficit countries. By consequence, the deficit countries that attracted lots of foreign capital experienced large run‐ups in house prices, whereas most surplus countries that exported capital exhibited flat or slow house price growth. We first use new house price data and a novel instrumental variable design to show the causal relationship between housing prices and capital inflows, particularly through debt bonanzas. We then argue that international capital flows affect the fiscal policy preferences of both voters and political parties by way of their impact on housing prices. Where capital inflows are large and housing prices are rising, we expect voters to respond by demanding both lower taxes and less publicly‐provided social insurance because rising house prices allow homeowners to self‐insure against income loss. In contrast, declining house prices produce greater demands for social insurance, particularly among those most exposed to housing market risk. We present evidence from two cross‐national surveys that supports these claims, as well as a “before and after” analysis of the housing crash in Eastern Europe. We also show that the connection between house prices and social policy also manifests itself in government spending outcomes, mediated by partisan control.     

Regime switching and the (in)stability of the price–rent relationship: evidence from the US

Present value models of house prices assert that in the absence of self-fulfilling bubbles, a house price is equal to the present discount value of all future rents, which implies a linear relationship between house price and rent, and hence a stable price-to-rent ratio. Using a Markov switching error correction model, we re-examine this relationship in the US housing market and find two distinctive regimes: one with a long-run relation between house price and rent predicted by the present value models and the other in which the relation is nonlinear. Furthermore, we find evidence that deviations of house prices from the present value models’ predictions are caused by the overreaction of house prices to movements in rents rather than speculative bubbles attributable to extraneous factors.     

Asset price volatility and government revenue

This paper investigates the effect of commercial, residential property and equity price volatility on the variability of cyclically adjusted government revenue. We find significant evidence that asset price volatility increases the variability of government revenue. A 1% increase in equity price volatility increases government revenue variability by 0.37–0.44%. An increase in residential property price volatility increases revenue volatility by about 0.15–0.22%, whereas this effect diminishes to 0.11% in case of commercial property price. This evidence reflects the automatic increase of government revenue variability due to asset price movements and supports arguments in favour of adjusting fiscal variables for both business cycle and asset price changes. However, we also find evidence that equity price variability increases revenue variability even when government revenue is adjusted for both economic and asset price cycles, indicating the presence of more complicated dynamics between fiscal variables and asset price changes.     

DO THE PHASES OF THE BUSINESS CYCLE DIE OF OLD AGE?

The paper re-examines the issue of duration dependence in the Australian classical and growth business cycles in light of the somewhat surprising results obtained recently by Cashin and Ouliaris (2004). In so doing the authors use the multinomial logit regime switching modelling approach of Layton and Smith (2003). The paper also represents an extension of the earlier work on the issue undertaken by Bodman (1998); the key extensions being that the issue is framed within an explicit established business cycle chronology, a leading index is also included within the analysis, and the growth cycle, in addition to the classical cycle, is considered. Strong evidence of duration dependence is found for periods of recession within the classical cycle and for both phases of the growth cycle. Moderate evidence of duration dependency is also found for periods of classical cycle expansion. However, the evidence in this regard is significantly reduced once movements in the leading index are included in the analysis with its movements exhibiting strong power in predicting the termination of classical business cycle expansions. For growth cycles, duration dependence symmetry is found across both phases of the cycle.     

当前中国宏观经济分析--兼论现阶段中国经济周期的阶段

分析当前中国宏观经济形势,其实就是判断中国经济目前所处周期的阶段。但是,在实践中要区分周期的四个阶段或转折点,是极其困难的。本文从两个层次考察当前中国经济周期的阶段。首先是缺口理论、总需求－总供给（AS－AS）模型、IS－LM模型这几种工具的综合分析;其次分析GDP增长率、失业率、价格指数这些重要宏观经济变量。这些工具和变量中,最有价值的是产出缺口理论和价格指数。通过对这些工具和变量的分析,本文的最后结论是：当前中国经济确实了明显转机,出现了回升的系列迹象,正在步入复苏阶段,但并示真正稳定走出低谷或萧条。     

Has Canadian house price growth been excessive?

The dramatic rise in the ratio of Canada's average house price to average rent has led to speculation that there is a bubble in the Canadian housing market. Others have argued, however, that the currently high level of house prices may be rationalized by the low cost of financing, given the decline in interest rates over the last two decades. In this article, we assess these arguments through the lens of a simple asset pricing model applied to city‐level data. We quantify the extent to which excess growth in Canadian house prices depends on the nature of the current regime governing real interest rates, expectations of rent growth in different cities and variations in property taxes.     

Forecasting house prices for the four census regions and the aggregate US economy in a data-rich environment

This article considers the ability of large-scale (involving 145 fundamental variables) time-series models, estimated by dynamic factor analysis and Bayesian shrinkage, to forecast real house price growth rates of the four US census regions and the aggregate US economy. Besides the standard Minnesota prior, we also use additional priors that constrain the sum of coefficients of the VAR models. We compare 1- to 24-months-ahead forecasts of the large-scale models over an out-of-sample horizon of 1995:01–2009:03, based on an in-sample of 1968:02–1994:12, relative to a random walk model, a small-scale VAR model comprising just the five real house price growth rates and a medium-scale VAR model containing 36 of the 145 fundamental variables besides the five real house price growth rates. In addition to the forecast comparison exercise across small-, medium- and large-scale models, we also look at the ability of the ‘optimal’ model (i.e. the model that produces the minimum average mean squared forecast error) for a specific region in predicting ex ante real house prices (in levels) over the period of 2009:04 till 2012:02. Factor-based models (classical or Bayesian) perform the best for the North East, Mid-West, West census regions and the aggregate US economy and equally well to a small-scale VAR for the South region. The ‘optimal’ factor models also tend to predict the downward trend in the data when we conduct an ex ante forecasting exercise. Our results highlight the importance of information content in large number of fundamentals in predicting house prices accurately.