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The international transmission of house price shocks
Are there contagion effects? Olivier de Bandt (BdF)
Karim Barhoumi (BdF)
Catherine Bruneau (Paris X and BdF)
Transmission/contagion• Transmission: reaction of house prices to
fundamentals in « normal times », including all available information– Fundamentals are correlated– Arbitrage behaviour across markets smooth out
idiosyncracies
• Contagion: 2 definitions:– Amplitude of reaction differs in « crisis periods », with
possible non linearities– Pandemic model: « from local to global and global to
local »
Data
• House prices from OECD and national sources
• OECD quarterly national accounts : GDP, inflation, short and long term interest rates, housing investment
• 15 countries: AUS, CAN, CHE, FIN, FRA, DEU, IRE, ITA, JPN, NLD, NOR, NZL, ESP, UK, US
Methods
• Single linear equations to estimate the link between ‘local’ and ‘global’ levels, including house prices
• Linear Favar models and causality tests– to take into account endogeneity– But need to accomodate the high persistence
of variables
• Crisis dummies and STAR models to assess possible non linearities
Main Findings
• Contagion from US house prices, which appear to be exogenous
• Spreading to the rest of the world, according to the « pandemic view » of contagion : common house prices « Granger cause » domestic house prices in Favar models
Plan
I – A closer look at the data
II- Empirical results
III- Conclusion
l- A closer look at the data (1/4)Common SW’s house prices in OECD countries
I- A closer look at the data (2/4)Using a larger database : fac1 correlated with
interest rates
I- A closer look at the data (3/4)Using a larger database : fac2 correlated with GDP
growth)
I- A closer look at the data (4/4)Using a larger database : fac3 corr. with OGAP
II- Empirical results
• 1- single one period ahead equation with global house price factor
• 2- single one period ahead equation with crisis dummy
• 3-single one period ahead equation with other global factors
• 4- single non linear (LSTAR) with all global factors
• 5- causality tests in Favar models
1- Single one period ahead linear equations=> international housing factor is significant
in many countries: AUS, ESP, UK
2- robustness to Financial Crisis periods (Reinhart & Rogoff, 2008)
Tab2: Robustness to crisis periods
3- Tab3: Sensitiveness to global factors in single one period ahead equation
4-LSTAR models: contemporaneous impact of the threshold variable in the two regimes
5-Causality in favar models of reduced order: US house prices are exogeneous and affect Common house
prices
Causality in favar models of reduced order: Other domestic house
prices are affected by Common house prices
Causality from systems : Other domestic house prices are affected by
Common house prices
III-Conclusion
• Evidence in favour of international transmission
• Evidence in favour of « pandemic model » with contagion from USA to rest of countries