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Leaning Against the Credit Cycle1

Paolo Gelain1,2 Kevin Lansing3 Gisle Natvik4,1

1Norges Bank

2European Central Bank

3Federal Reserve Bank of San Francisco

4BI Norwegian Business School

Refit workshopNorges Bank

April 2017

1Any views expressed here are those of the authors, and not those of NorgesBank, the European Central Bank or the Federal Reserve Bank of SanFrancisco.

Introduction

I Recent monetary policy debate: Emphasis on debt

I Credit typically moves gradually and persistently over time

I The “Credit cycle” (Drehman, Borio, Tsatsaronis, 2012, etc)

I Schularik and Taylor (2012): Debt matters for the risk andcost of crises

I “... policymakers ignore credit at their peril”

I Mason and Jayadev (2014): Household leverage largely drivenby income growth, inflation and interest rates rather than newborrowing.

I Svensson (2013): Interest rate hikes likely to raisedebt-to-GDP

I Do not address a high debt-to-GDP ratio with interest ratehikes

Introduction

I Recent monetary policy debate: Emphasis on debtI Credit typically moves gradually and persistently over time

I The “Credit cycle” (Drehman, Borio, Tsatsaronis, 2012, etc)

I Schularik and Taylor (2012): Debt matters for the risk andcost of crises

I “... policymakers ignore credit at their peril”

I Mason and Jayadev (2014): Household leverage largely drivenby income growth, inflation and interest rates rather than newborrowing.

I Svensson (2013): Interest rate hikes likely to raisedebt-to-GDP

I Do not address a high debt-to-GDP ratio with interest ratehikes

I Problem: Standard DSGE models used for monetary policyanalysis do not account well for debt dynamics

I Key assumption: All debt fully amortized each period.

Mortgage Debt Dynamics – Data vs Standard Model

I Problem: Standard DSGE models used for monetary policyanalysis do not account well for debt dynamics

I Key assumption: All debt fully amortized each period.

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010−0.2

−0.15

−0.1

−0.05

0

0.05

0.1

0.15

0.2

0.25

Debt−to−GDP, U.S. DATADebt−to−GDP, 1 quarter

Our Paper

I Monetary policy in a simple New Keynesian model with longterm debt

I Collateral constraint (Iaccoviello, 2005)I Long term debt – only new loans constrained

I Q1: What is the likely effect of an interest rate hike on theaggregate debt burden?

I Q2: What are the consequences of mechanically raising theinterest rate in response to debt?

I Q3: What characterizes Debt-to-GDP targeting vs. Inflationtargeting?

I Estimate a medium scale DSGE model

I Is long-term debt quantitatively relevant?I Do the answers to Q1-Q3 hold within richer, estimated model

and more shocks?

Our Paper



I Small, persistent, possibly positive in the short run.





and more shocks?

Our Paper




I IndeterminacyI Debt-to-GDP stabilized only by a negative debt-to-GDP

response




and more shocks?

Our Paper





I Whenever inflation targeting implies a debt-to-GDP increase,debt-to-GDP stabilization implies a more expansionary policy



and more shocks?

Our Paper






I Is long-term debt quantitatively relevant?

I Correlation patterns in model closer to empirical (US)counterparts

I Do the answers to Q1-Q3 hold within richer, estimated modeland more shocks?

Our Paper







and more shocks?

I Yes.

Our Paper

I Key mechanism: “Fisher dynamics”

Related Literature

I ”Credit cycle”: Drehman et al. (2012), Aikman et al. (2013),Strohsal et al. (2015), Runstler and Vlekke (2015), Iacoviello(2015), Galati et al. (2016)

I Monetary policy and debt-to-GDP: Svensson (2013), Laseenand Strid (2013), Robstad (2014), Alpanda and Zubairy(2016), Bauer and Granziera (2016)

I Multiperiod debt: Campbell and Hercowitz (2004), Rubio(2011), Kydland et al. (2012), Justiniano et al. (2013),Garriga et al. (2013), Calza et al. (2013), Chen et al. (2013),Andrees et al. (2014), Guerrieri and Iacoviello (2015)

I Debt and inflation: Mason and Jayadev (2014), Gomes et al.(2014)

Simple NK Model with Housing and Long-Term Debt

I Two household types: Savers (patient) and Borrowers(impatient)

I Borrowing subject to collateral constraint on new loans onlyI Reduced form law of motion for amortization as in Kydland,

Rupert and Sustek (2013)

I Firms owned by Savers

I Central bank

I Fixed supply of houses

I Calvo pricing, price indexation and consumption habits

Household Problem

Maximize

E0

∞∑t=0

βtUt (ct, ht, Lt) ,

subject to budget and borrowing constraints:

cb,t + qt(hb,t − hb,t−1) +1 + rt−1πt

bb,t−1 = wb,tLb,t + bb,t,

bb,t = ϑmEt (qt+1πt+1)hb,t

1 + rt+ (1− ϑ) (1− δt−1)

bb,t−1πt

.

I ϑ = refinancing share

I δt amortization share

Amortization Process

δt =

(1− lt

bt

)δαt−1 +

ltbt

(1− α)κ ,

where

lb,t = bb,t − (1− δt−1)bb,t−1πt

I α ∈ [0, 1) and κ > 0 are parameters and

I lt/bt+1 is the share of new annuity loans in the end-of-periodoutstanding stock of debt.

Debt Contract

0 50 1000

5000

10000A. QUARTERLY PAYMENTS

0 50 1000

0.5

1

1.5

2

2.5x 10

5 B. BALANCE

0 50 100 1500

50

100C. COMPOSITION OF PAYMENTS

0 50 100 150−10

−5

0

5x 10

−4D. APPROXIMATION ERROR

Calibration

I Steady state targetsI Share of liquidity constrained, relative hours worked and

relative labor incomes in Justiniano, Primiceri and Tambalotti(2013)

I Ratio of housing wealth to yearly consumption in Iaccovielloand Neri (2010)

I Approximate 30-year annuity loan contract, as in Kydland,Rupert, Sustek (2013)

I Household debt-to-housing value equal to 0.5

Calibration

I Steady state targetsI Share of liquidity constrained, relative hours worked and

relative labor incomes in Justiniano, Primiceri and Tambalotti(2013) (n, νl,l, νl,b, $)

I Ratio of housing wealth to yearly consumption in Iaccovielloand Neri (2010) (νh)

I Approximate 30-year annuity loan contract, as in Kydland,Rupert, Sustek (2013) (κ, α)

I Household debt-to-housing value equal to 0.5 (ϑ)

Table: Parameter Values

βl 0.99 ϕ 1 ε 6 m 0.8βb 0.97 ε 0.5 θ 0.75 ρz 0.9νh 0.075 n 0.61 ι 0.5 ϑ 0.031νl,l 0.10 $ 0.5 κ 1.013 φπ 1.5νl,b 0.23 ξ 0.33 α 0.996 φr 0.75

Monetary Policy Shock

10 20 30−0.2

−0.1

0

0.1

0.2Interest Rate

10 20 30−0.2

−0.1

0

0.1

0.2Inflation

10 20 30−0.2

−0.1

0

0.1

0.2GDP

10 20 30−0.6

−0.3

0

0.3

0.6House Prices

10 20 30−3

−2

−1

0

1

2Household Debt

10 20 30−3

−2

−1

0

1

2New Loans

10 20 30−3

−2

−1

0

1

2Debt/GDP

10 20 30−1

−0.5

0

0.5

1Amortization

1q−Debt 30y−Debt

Slow-Moving Debt Burden and Variable vs ConstantAmortization Rate

20 40 60 80 100 120−0.4

−0.2

0

0.2

0.4Household Debt

20 40 60 80 100 120−0.4

−0.2

0

0.2

0.4Debt/GDP

20 40 60 80 100 120−3

−2

−1

0

1New Loans

20 40 60 80 100 120−0.1

0

0.2

0.4

0.6Amortization Rate

30y Fixed Amortization 30y Annuity Loan

Policy Implication?

I If we accept that tighter monetary policy raises the debtburden:

I What is the implication for systematic monetary policy?

I First approach: What are the consequences of letting theinterest rate systematically respond to debt-to-GDP?

I Simple policy rule

Rt = (1 + r) πφπt

(btyt

)φb/y

Determinacy Analysis – Reacting to Debt-to-GDP

0 0.2 0.4 0.6 0.8 10.94

0.96

0.98

1

1.02

φb/y

φ π

Determinacy

Indeterminacy

1q−debt

0 0.2 0.4 0.6 0.8 1

12

4

6

8

10

Determinacy

Indeterminacy

φb/y

φ π

10y−debt

0 0.2 0.4 0.6 0.8 1

1

4

8

12

16

Determinacy

Indeterminacy

φb/y

φ π

20y−debt

0 0.2 0.4 0.6 0.8 11

6

12

18

24

Determinacy

Indeterminacy

φb/y

φ π

30y−debt

Determinacy Analysis – Reacting to the Real Debt Level

0 0.5 10.92

0.94

0.96

0.98

1

φb

φ π

Determinacy

Indeterminacy

1q−debt

0 0.5 1

12

4

6

8

10

Determinacy

Indeterminacy

φb

φ π

10y−debt

0 0.5 114

8

12

16

Determinacy

Indeterminacy

φb

φ π

20y−debt

0 0.5 11

6

12

18

24

φb

φ π

Determinacy

Indeterminacy

30y−debt

Determinacy Analysis. Intuition

1q-debt:

I An increase in inflation expectations unjustified byfundamentals causes:⇒ lower real interest rate

⇒ relaxation of the collateral constraint⇒ increased debt

I Response to debt implies stronger response to inflationarypressure

Determinacy Analysis. Intuition

30y-debt:

I An increase in inflation expectations unjustified byfundamentals causes:⇒ lower real interest rate

⇒ relaxation of the collateral constraint⇒ increased uptake of new loans

... but pre-existing debt is unaffected

⇒ total stock of real debt (-to-GDP) falls due to highercurrent inflation

I Response to debt implies weaker response to inflationarypressure

Debt and Inflation Volatility under Simple Policy Rules

0 0.5 1 1.5 20

0.05

0.1

0.15

0.2

φb/y

Std

(b/y

)1q−Debt

0 0.5 1 1.5 20

0.02

0.04

0.06

0.08

0.1

φb/y

Std

(π)

−2 −1.5 −1 −0.5 00

0.05

0.1

0.15

0.2

φb/y

30y−Debt

−2 −1.5 −1 −0.5 00

0.002

0.004

0.006

0.008

0.01

φb/y

Targeting Frontiers

An Estimated Medium Scale DSGE Model

I Do the above findings generalize?

An Estimated Medium Scale DSGE Model

I Richer model of housing and the macro economy: Iacovielloand Neri (2010)

I Housing construction sector, adjustment costs, etc.

I Model evaluation: Estimation, likelihood comparison, keymoments in data vs. model, narrative of 2000s’ boom-bustepisode

I Household debt as observable (unlike Iacoviello and Neri, 2010)

I More shocks (10)

I Upshot of estimation:

I Estimated debt duration: 73 quartersI AR-coefficient on ltv-shocks drops from 0.98 to 0.73I 1q model: log data density of 6128I 73q model: log data density of 6418 (“Decisive evidence”,

Kass and Raftery, 1995)

Estimates Housing and LTV Shocks

Model Evaluation

k1 2 3 4 5

Real debt

auto

corr

ela

tion

0.6

0.8

11q Debt

Data5th - 95thMedian

k1 2 3 4 5

0.6

0.8

173q Debt

Data5th - 95thMedian

k-5 0 5D

ebt-

House p

rices

corr

ela

tion

-0.5

0

0.5

1

k-5 0 5

-0.5

0

0.5

1

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

% d

evia

tion fro

mste

ady s

tate

-40

-20

0

20

Lending Standard Shock

1-quarter debt model 73-quarter debt model

Monetary Policy Shock - Estimated Model

0 10 20 30

0

0.05

0.1

0.15

0.2Interest Rate

1q Debt 73q Debt

0 10 20 30

-0.06

-0.04

-0.02

0

Inflation

0 10 20 30

-0.8

-0.6

-0.4

-0.2

0GDP

0 10 20 30

-0.6

-0.4

-0.2

0

House Prices

0 10 20 30

-1.5

-1

-0.5

0

Real Debt

0 10 20 30

-1

-0.5

0

0.5

Debt/GDP

Debt and Inflation Volatility under Simple Policy Rules -Estimated Model

φb/y

-2 -1 00

0.1

0.2

0.3Std(b/y)

φy=0.52

φy=3

φb/y

-2 -1 00

0.01

0.02

0.03

0.04Std(π)

φ∆b

-2 0 2 40

0.1

0.2

0.3Std(b/y)

φ∆b

-2 0 2 40

0.01

0.02

0.03

0.04Std(π)

φE(b/y)

-2 -1 00

0.1

0.2

0.3Std(b/y)

1y forecast2y forecast

φE(b/y)

-2 -1 00

0.01

0.02

0.03

0.04Std(π)

φl

0 1 20

0.1

0.2

0.3Std(b/y)

φl

0 1 20

0.01

0.02

0.03

0.04Std(π)

Debt-to-GDP vs. Inflation Targeting - Estimated Model

10 20 30−2

−1

0

1

2

Nonhousing ProductivityShock

De

bt/

GD

P

10 20 30−0.15

−0.1

−0.05

0

0.05

Infla

tion

10 20 300

0.5

1

1.5

GD

P

10 20 30−0.8−0.6−0.4−0.2

00.2

Intertemp PreferenceShock

10 20 30−0.05

0

0.05

0.1

10 20 30−0.2

−0.1

0

0.1

0.2

10 20 30−0.5

0

0.5

1

1.5

Housing PreferenceShock

10 20 30−0.05

0

0.05

0.1

10 20 30−0.04

−0.02

0

0.02

0.04

10 20 30−1

0

1

2

3

Lending StandardsShock

10 20 30−0.2

0

0.2

0.4

Γ=0 Γ=1 Estimated Rule

10 20 30−0.5

0

0.5

1

1.5

Debt-to-GDP vs. Inflation Targeting - Estimated Model

10 20 30−0.5

−0.25

0

0.25

Housing ProductivityShock

De

bt/G

DP

10 20 30−0.05

−0.025

0

0.025

Infla

tion

10 20 30−0.05

−0.025

0

0.025

GD

P

10 20 30−0.4

−0.2

0

0.2

Investment SpecificShock

10 20 30−0.05

−0.025

0

0.025

0.05

10 20 300

0.1

0.2

0.3

10 20 30−0.5

0

0.5

1Labor Supply Shock

10 20 30−0.05

0

0.05

0.1

0.15

10 20 30−1

−0.5

0

0.5

10 20 30−20

0

20Cost Shock

10 20 30−0.1

0

0.1

0.2

0.3

Γ=0 Γ=1 Estimated Rule

10 20 30−10

−5

0

5

Conclusion

I A tractable model with gradual amortization process capturespersistent nature of debt dynamics a la “credit cycle”

I Captures the low contemporary correlation and the lead-lagrelationship between debt-to-GDP and house prices

I Policy tightening has minor, but persistent, effect on debt

I Might even raise households’ debt-to-GDP in the short run(consistent with Svensson, 2013, Granziera and Bauer, 2016,Robstad, 2015)

I Mechanically increasing the interest rate in response to thedebt-to-GDP level causes equilibrium indeterminacy

I Opposite under 1-quarter-debtI Destabilizes debt itselfI Responding negatively to debt-to-GDP stabilizes debt

Conclusion

I Debt-to-GDP targeting implies more contractionary policythan inflation targeting, when the latter makes debt-to-GDPdecrease.

I Debt-to-GDP targeting implies more expansionary policy thaninflation targeting, when the latter makes debt-to-GDPincrease.

⇒ “Fisher Dynamics” are key to how monetary policy should dealwith high indebtedness.

Debt-to-GDP vs. Inflation Targeting

Set it so as to minimize:

∑∞j=0 β

jl

[(1− Γ)

((1− λy)π2t+j + λy

(yt+j

yft+j

)2)

+ Γ(bb,t+j/yt+j

bb/y

)2]

Debt-to-GDP vs. Inflation Targeting, 30y-debt

10 20 30−0.5

−0.25

0

0.25Inflation

10 20 300

0.5

1

1.5GDP

10 20 300

1

2

Debt

10 20 30−1

0

1

2

Debt/GDP

10 20 30−1

−0.5

0

0.5Interest Rate

10 20 30−0.3

−0.15

0

0.15

0.3Real Interest Rate

Γ=0 Γ=1

Frontiers Back

Debt-to-GDP vs. Inflation Targeting, 1q-debt

5 10 15 20 25 30−4

−2

0

2Inflation

5 10 15 20 25 300

0.5

1

1.5GDP

5 10 15 20 25 300

2

4

6

8Debt

5 10 15 20 25 30−2

0

2

4

6Debt/GDP

5 10 15 20 25 30−4

−2

0

2Interest Rate

5 10 15 20 25 30−0.3

−0.15

0

0.15Real Interest Rate

Back

Variance Frontiers and Welfare under Targeting Policies

0 0.01 0.02 0.03 0.04 0.050

0.001

0.002

0.003

0.004

0.005

Var(b)

L 1

Variance Frontier

0 0.2 0.4 0.6 0.80

0.001

0.002

0.003

0.004

0.005

Var(b)

L 1

Variance Frontier

0 0.2 0.4 0.6 0.8 1−0.0006

−0.0004

−0.0002

0

Weight on debt

Wel

fare

Lender Welfare Gain

λ

y=0

λy=0.25

λy=0.5

0 0.2 0.4 0.6 0.8 1−0.0008

−0.0004

0

0.0004

0.0008

Weight on debt

Wel

fare

Borrower Welfare Gain

Γ=1

Γ = 0.01

Γ = 0

Γ=1

Back

Estimation: Structural Parameters

Table 1: Calibrated Parameters in the Medium Scale ModelParameter Description/Target Value

βl Steady-state annual real interest rate 3% 0.9925βb Impatient households’ discount factor 0.97νh Ratio of housing wealth to GDP of 1.35% 0.12ξ Capital share in goods production 0.35µh Capital share in housing production 0.10µla Ratio of value of residential land to annual output of 50% 0.10µib Ratio of business capital to annual GDP of 2.1% 0.10δh Ratio of residential investments to total output of about 6% 0.01δkc Ratio of nonresidential investments to GDP of about 27% 0.025δkh Ratio of nonresidential investments to GDP of about 27% 0.03X, Xwc, Xwh Steady-state mark-up of 15% 1.15m = Rbb/qhb Steady-state ratio of debt to real estate 0.50m Loan-to-value ratio on new mortgages 0.85ρs Annual autocorrelation of trend inflation around 0.9 0.975

Notes: All parameter values follow from Iacoviello and Neri (2010).

Table 2: Estimation: Prior and Posterior Distribution of the Structural ParametersPrior distribution Posterior distribution

1-quarter debt model Long-term debt modelParameter Distribution Mean SD Median 90% HPD Median 90% HPD

γl Beta 0.5 0.075 0.29 0.22 – 0.36 0.26 0.20 – 0.32γb Beta 0.5 0.1 0.42 0.31 – 0.55 0.51 0.41 – 0.62ϕL,l Gamma 0.5 0.1 0.39 0.27 – 0.53 0.42 0.30 – 0.51ϕL,b Gamma 0.5 0.1 0.54 0.38 – 0.70 0.48 0.34– 0.71µl Normal 1 0.1 -0.05 -0.08 – -0.02 -0.05 -0.08 – -0.03µb Normal 1 0.1 1.18 1.02 – 1.31 1.12 0.96 – 1.31φk,c Gamma 10 2.5 20.14 17.09 – 23.29 20.85 18.45 – 23.57φk,h Gamma 10 2.5 10.60 6.76 – 15.02 9.58 7.03 – 12.57$ Beta 0.65 0.05 0.65 0.57 – 0.73 0.62 0.56 – 0.69φR Beta 0.75 0.1 0.61 0.55 – 0.66 0.63 0.57 – 0.68φπ Normal 1.5 0.1 1.42 1.32 – 1.51 1.40 1.31 – 1.50φy Normal 0 0.1 0.56 0.46 – 0.65 0.52 0.44 – 0.68θ Beta 0.667 0.05 0.89 0.87 – 0.91 0.89 0.87 – 0.91υ Beta 0.5 0.2 0.52 0.41 – 0.65 0.55 0.45 – 0.66θw,c Beta 0.667 0.05 0.77 0.73 – 0.81 0.76 0.72 – 0.80ιw,c Beta 0.5 0.2 0.08 0.02 – 0.15 0.07 0.02 – 0.14θw,h Beta 0.667 0.05 0.77 0.72 – 0.81 0.75 0.72 – 0.81ιw,h Beta 0.5 0.2 0.40 0.21 – 0.60 0.42 0.23 – 0.61ζ Beta 0.5 0.2 0.78 0.66 – 0.91 0.80 0.68 – 0.92δ Normal∗ 0.10 0.02 1 – 0.0307 0.0223 – 0.0412

Log data density 6131.05 6415.67

Notes: The median implied value of ϑ is 0.59 in the 1-quarter debt model, and 0.042 in the long-term debt

model. ∗The prior distribution for δ refers only to the long-term debt model because δ = 1 with 1-quarter debt.

The sample is 1965q1 to 2014q1.

31

Back

Estimation: Shock Processes

Table 3: Estimation: Prior and Posterior Distribution of the Shock ProcessesPrior distribution Posterior distribution

1-quarter model Long-term debt modelParameter Distribution Mean SD Median 90% HPD Median 90% HPD

ρz Beta 0.8 0.1 0.95 0.93 – 0.97 0.96 0.94 – 0.98ρAH Beta 0.8 0.1 0.996 0.991 – 0.999 0.996 0.992 – 0.999ρAK Beta 0.8 0.1 0.92 0.90 – 0.95 0.93 0.90 – 0.95ρvh Beta 0.8 0.1 0.97 0.95 – 0.99 0.98 0.96 – 0.99ρc Beta 0.8 0.1 0.96 0.86 – 0.99 0.96 0.95 – 0.99ρνl Beta 0.8 0.1 0.97 0.95 – 0.99 0.97 0.95 – 0.99ρm Beta 0.8 0.1 0.98 0.96 – 0.99 0.78 0.68 – 0.87σz Inv. Gamma 0.001 0.01 0.0100 0.0091 – 0.0110 0.0100 0.0091 – 0.0110σAH Inv. Gamma 0.001 0.01 0.0213 0.0195 – 0.0233 0.0216 0.0198 – 0.0236σAK Inv. Gamma 0.001 0.01 0.0107 0.0089 – 0.0126 0.0111 0.0096 – 0.0127σνh Inv. Gamma 0.001 0.01 0.0382 0.0271 – 0.0508 0.0335 0.0237 – 0.0452σR Inv. Gamma 0.001 0.01 0.0032 0.0027 – 0.0037 0.0030 0.0027 – 0.0034σc Inv. Gamma 0.001 0.01 0.0123 0.0047 – 0.0288 0.0122 0.0078 – 0.0185σνl Inv. Gamma 0.001 0.01 0.0196 0.0161 – 0.0236 0.0192 0.0157 – 0.0233σp Inv. Gamma 0.001 0.01 0.0039 0.0035 – 0.0044 0.0039 0.0035 – 0.0044σs Inv. Gamma 0.001 0.01 0.0280 0.0211 – 0.0348 0.0276 0.0216 – 0.0339σm Inv. Gamma 0.001 0.01 0.0180 0.0165 – 0.0196 0.1069 0.0764 – 0.1368σL,h Inv. Gamma 0.001 0.01 0.1647 0.1511 – 0.1793 0.1624 0.1495 – 0.1787σω,h Inv. Gamma 0.001 0.01 0.0051 0.0047 – 0.0056 0.0050 0.0047 – 0.0056

Notes: σL,h and σω,h are standard deviations for measurement errors in hours worked and wages in the housing

sector. The sample is 1965q1 to 2014q1.

Table 4: Variance DecompositionNon-houseprod.

Mon.pol.

Houseprod.

Housepref.

Inv.spec.prod.

CostInfl.

targetLaborsupply

Intert.Pref.

Lend.std.

GDP 20.88 3.57 2.62 0.41 8.04 3.80 3.55 55.77 1.35 0.01Consumption 24.39 2.76 0.15 0.19 3.50 3.52 3.34 59.55 2.59 0.01Inflation 1.90 1.74 0.05 0.16 0.65 17.58 70.20 1.05 6.55 0.12Residential inv. 0.28 0.78 67.32 18.49 0.04 0.14 0.19 10.31 2.43 0.01Business inv. 14.63 4.11 0.05 0.04 33.05 4.52 4.08 30.39 9.04 0.09Hours cons. 1.68 6.30 0.04 0.04 0.59 6.85 5.12 79.04 0.32 0.03Hours housing 0.48 1.96 24.23 42.23 0.07 0.34 0.50 24.73 5.43 0.03House prices 1.62 0.28 90.16 5.97 0.22 0.29 0.18 0.71 0.57 0.00Interest rate 2.26 5.67 0.17 0.39 3.03 4.10 68.66 2.35 13.09 0.28Wages cons. 1.77 6.60 0.08 0.17 1.52 1.38 68.46 12.98 6.93 0.13Wages housing 1.97 5.97 0.05 0.17 1.45 2.18 66.53 14.23 7.29 0.15Househ. debt 1.96 1.26 2.37 31.84 0.62 2.98 5.86 7.41 6.05 39.66

Notes: Long-run variance decomposition from the estimated model with long-term debt.

32

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Credit and Housing Shocks - Estimated ModelWhen does debt duration matter if monetary policy does not reactto debt?

0 10 20 30

Housin

g

pre

fere

nce

shock

0

1

2

3Real Debt

1q Debt 73q Debt

0 10 20 30

Housin

g

pro

ductivity

shock

-2

-1

0

0 10 20 30

Lendin

g

sta

ndard

sshock

0

2

4

0 10 20 30-0.1

-0.05

0

Lenders' Consumption

0 10 20 30-0.1

-0.05

0

0 10 20 30-0.1

-0.05

0

0.05

0 10 20 30-0.2

0

0.2

Borrowers' Consumption

0 10 20 30-0.4

-0.2

0

0.2

0 10 20 30-0.2

0

0.2

0 10 20 30

-0.05

0

Aggregate Consumption

0 10 20 30

-0.1

-0.05

0

0 10 20 30-0.05

0

0.05

0.1

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