House Prices, Bank Credit and Macroeconomic Shocks in Denmark
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Ayele, Yohannes Ewunetie1, Forfatter
Jensen, Henrik2, Vejleder
1Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7001              
2Økonomisk Institut, Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7014              
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Ukontrollerede emneord: House Prices, Bank Credit, Cointegration, impulse response, shocks
 Abstract: Executive Summary
Though housing market is one of the main components of domestic economy which has a significant impact on employment, production and income, it is also one of the volatile component of the economy. As a result, house prices has been subject to frequent fluctuations. Following the recent U.S. subprime crisis and the subsequent financial crisis all over the developed world, there is a debate at the academic and policy level on the role of several economic factors in the house prices fluctuations.

Despite the fact that there are few studies on what causes house price fluctuation, the question of how macroeconomic shocks affect house price? and Is there a long run relationship between house prices and income? were uncertain from previous empirical studies. Methodologically, most of the previous empirical studies on the effect of macroeconomic factors on house prices fluctuation predominantly uses structural VAR model. In using the structural VAR model, there is a need of the transformation of non-stationary variables to stationary by differencing which is clearly model misspecification since there may exist cointegration relationship between two or more of the level non-stationary variables. If the analysis is conducted based on structural VAR model but variables in levels, the impulse response from VARs in level without cointegration analysis are inconsistent at longer horizon.

Therefore, in this study we investigate the effect of different macroeconomic shocks with special emphasis on monetary policy shock on house prices in Denmark using the impulse response analysis from Structural Vector Error Correction Model (Structural VECM) instead of Structural Vector Autoregressive (SVAR). The structural VECM model, in contrast with SVAR, begins with an explicit statement of the long-run relationships between the variables of the model obtained from macroeconometrc theory.

The result shows that there is a long-run cointegrating relationship between house price and real income. The effect of macroeconomic shocks on house price is analyzed using the impulse response from structural VECM. The result shows that (1) contractionary monetary policy shocks decreases real house price (2) supply shock, demand shock and inflationary shocks increases the real house price (3) nominal permanent shocks decreases real house price. The variance decomposition result shows that in the short run the house price fluctuation is mainly caused by a mixture of inflationary shock, monetary policy shock and both supply and nominal shocks. However, in the long run it is found that the supply shock is the main determinant for housing market price variability.

In addition to examining the role of macroeconomic shocks on house prices, we also study the role of house prices on bank lending in Part II of the thesis. In this section, the study investigates two questions (1) Is there long-run cointegrating relationship between bank lending, house price, economic activity and lending interest rate (2) what is the role of housing price on credit dynamics? Lack of empirical study on the role of house price on bank lending in Denmark is the main motivation. The multivariate cointegration analysis shows that there is a long-run cointegration between bank lending and real house price, real income and bank lending interest rate. The estimated alpha coefficient shows that the bank lending adjusts significantly but slowly when there is deviation from the long-run relationship. The impulse response show that the shock from house price has positive effect on the bank lending. The variance decomposition show that the main component of the bank lending fluctuation mainly comes from house price shock and from its own shocks. However, in the longer horizon, the shocks from house price and real income are the main factor.
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 Type: Speciale
Alternativ titel: A Structural cointegrated VAR Analysis
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Sprog: English - eng
 Datoer: 2013-11-29
 Sider: -
 Publiceringsinfo: København : Københavns Universitet
 Indholdsfortegnelse: Chapter One.1
1.1 Introduction.1
1.2 Objectives of the study4
Chapter Two: Literature Review5
Chapter Three: Methodology.12
3.1. Introduction.12
3.2. Nominal Model12
3.3. Real Model.15
3.4. Structural VECM.16
Chapter Four: Result and Discussion.19
4.1. Introduction19
4.2. Data Description19
4.3. Theoretical Steady State Relationships20
4.4. The Nominal Model Analysis21
4.5. The Real Model .25
4.6. Long-run Identification32
Chapter Five: Impulse Response Analyses from Structural VECM39
5.1. Introduction39
5.2. Identification in Structural VECM.39
5.3. Impulse Response Analysis.44
5.4. Variance Decomposition52
Part II56
Chapter Six: Bank Lending and House Prices.56
6.1. Introduction56
6.2. The Model and Methodology 58
6.3. Data59
6.4. Model Specification.64
6.5. The Long-run Result63
6.6. Structural VECM: Credit Dynamics .66
Chapter Seven. Conclusion72
List of references74
 Note: -
 Type: Speciale
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