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Essays on credit frictions and the macroeconomy

Foulis, Angus (2013) Essays on credit frictions and the macroeconomy. PhD thesis, London School of Economics and Political Science.

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The three chapters in this thesis consider the role macroprudential policy can play in economic booms and busts. The first two chapters concern the recent housing boom in the United States. Whilst it is popularly thought that a significant easing of credit standards caused the boom, the econometric attempts to establish this are largely inconclusive. The fall in real interest rates also fail to account for the magnitude of the boom, suggesting buyers' irrational exuberance. I approach this problem in a new way using tiered housing data that separately covers the price movements of cheap and expensive houses. During the US boom, the cheapest houses had the largest relative price gains in 51 of 52 metro areas studied. In the first chapter I use a simple model to show that this pattern could not have occurred without an easing of credit standards: without this, buyer exuberance or a fall in interest rates would produce the opposite pattern. Chapter two examines alternative explanations for the tiered pattern, including changes in housing supply, speculation and differential income growth. I show that these variables are not responsible for the pattern, but that, in keeping the theory, there is a statistically and economically significant relationship between credit easing and the relative performance of low and high tier house prices. Taken together, the two chapters conclude that the housing boom would have significantly smaller if policy had prevented credit standards from easing. The third chapter considers credit traps; a situation in which a severe financial crisis gives rise to a prolonged period of low lending to, and stagnation of, the real economy. We introduce a model in which credit traps are possible, then consider what macroprudential policy can do to help the economy escape from a trap, and to reduce the chances of falling into one.

Item Type: Thesis (PhD)
Additional Information: © 2013 Angus Foulis
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
J Political Science > JA Political science (General)
Sets: Departments > Economics
Supervisor: Benigno, Gianluca

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