Working Papers
Housing and Consumption Volatility
Journal of International Economics, Revise and Resubmit
Business cycles in emerging economies exhibit both greater volatility of housing prices and relative consumption compared to business cycles in rich countries. This paper provides evidence of a positive relationship between housing price and relative consumption volatility across countries, and explores that linkage by building a real business cycle model of a small open economy with both housing and rental markets. While housing consumption, as measured through rental prices, is a non-negligible portion of total consumption, the role of the rental market has largely been overlooked in studies of consumption volatility. By explicitly modeling separate housing and rental sectors, this paper is able to explain some new stylized facts that emerge when housing and non-housing consumption are disaggregated: first, housing consumption is more volatile than non-housing consumption in emerging countries; and, second, even after controlling for housing consumption volatility, non-housing consumption in emerging economies is still more volatile than that in rich countries. Simulation results suggest that cross-country variation in the volatility of shocks to credit prices and availability is a driving force in generating the observed relationship between house price and relative consumption volatility. The model also suggests that a financial friction stemming from constraints in housing-collateralized credit can explain excess non-housing consumption volatility in emerging countries, while rental market frictions may account for the greater housing consumption volatility observed.
Journal of International Economics, Revise and Resubmit
Business cycles in emerging economies exhibit both greater volatility of housing prices and relative consumption compared to business cycles in rich countries. This paper provides evidence of a positive relationship between housing price and relative consumption volatility across countries, and explores that linkage by building a real business cycle model of a small open economy with both housing and rental markets. While housing consumption, as measured through rental prices, is a non-negligible portion of total consumption, the role of the rental market has largely been overlooked in studies of consumption volatility. By explicitly modeling separate housing and rental sectors, this paper is able to explain some new stylized facts that emerge when housing and non-housing consumption are disaggregated: first, housing consumption is more volatile than non-housing consumption in emerging countries; and, second, even after controlling for housing consumption volatility, non-housing consumption in emerging economies is still more volatile than that in rich countries. Simulation results suggest that cross-country variation in the volatility of shocks to credit prices and availability is a driving force in generating the observed relationship between house price and relative consumption volatility. The model also suggests that a financial friction stemming from constraints in housing-collateralized credit can explain excess non-housing consumption volatility in emerging countries, while rental market frictions may account for the greater housing consumption volatility observed.
A New Angle on Excess Consumption Volatility in Emerging Countries: Does House Price Matter?
Journal of International Money and Finance, Revise and Resubmit (3rd round)
This paper focuses on house prices in order to explain excess consumption volatility, which is one of the stylized facts of the business cycle observed in emerging countries. The relative consumption volatility compared to output volatility is higher in emerging countries than in rich countries. Because house prices in emerging countries are more volatile than in advanced countries, this paper suggests house price fluctuation as a driving source of excess consumption volatility. To begin, I construct a cross-country dataset, and suggest new evidence that house prices are more correlated with consumption in the case of emerging countries compared to rich countries while the correlation between house prices and output are similar between two country groups. Then, I build a business cycle model given exogenous house price and output processes in order to explain excess consumption volatility puzzle. The result of the model suggests that high house price volatility in emerging countries causes their excess consumption volatility and that the mechanisms behind it are a collateral effect and a rental price pass-through. The former is related to the borrowing capacity affected by house price changes, and the latter is related to the link between house prices and housing consumption volatility
Journal of International Money and Finance, Revise and Resubmit (3rd round)
This paper focuses on house prices in order to explain excess consumption volatility, which is one of the stylized facts of the business cycle observed in emerging countries. The relative consumption volatility compared to output volatility is higher in emerging countries than in rich countries. Because house prices in emerging countries are more volatile than in advanced countries, this paper suggests house price fluctuation as a driving source of excess consumption volatility. To begin, I construct a cross-country dataset, and suggest new evidence that house prices are more correlated with consumption in the case of emerging countries compared to rich countries while the correlation between house prices and output are similar between two country groups. Then, I build a business cycle model given exogenous house price and output processes in order to explain excess consumption volatility puzzle. The result of the model suggests that high house price volatility in emerging countries causes their excess consumption volatility and that the mechanisms behind it are a collateral effect and a rental price pass-through. The former is related to the borrowing capacity affected by house price changes, and the latter is related to the link between house prices and housing consumption volatility
The Consumption Response to Universal Payments under the COVID-19 Pandemic: Case of South Korea with Seungjun Baek (Sejong U), Seongeun Kim (Sejong U), and Tae-hwan Rhee (Sejong U)
Submitted, *SSRN Link
We investigate the impact of the universal stimulus payments (100-350 thousand KRW per person) distributed by the largest Korean province of Gyeonggi under the COVID-19 pandemic on household consumption using large-scale credit and debit card data from the Korea Credit Bureau. As the neighboring Incheon metropolitan city did not distribute stimulus payments, we employ a difference-in-difference approach and find that the stimulus payments increased monthly consumption per person by approximately 30 thousand KRW within the first 20 days. The overall MPC of the payments was approximately 0.40 for single families. The MPC decreased from 0.58 to 0.36 as the transfer size increased from 100-150 to 300-350 thousand KRW. We also find that universal payments had a very heterogeneous effect on different groups of people. The MPC for liquidity-constrained households, which account for 8% of residents, was close to one, but the MPCs of the other household groups were not significantly different from zero. The unconditional quantile treatment effect estimates reveal that there was a positive and significant increase in monthly consumption only on the lower part of the distribution below the median. Our results show that a more targeted approach may more efficiently achieve the policy goal of boosting aggregate demand.
Submitted, *SSRN Link
We investigate the impact of the universal stimulus payments (100-350 thousand KRW per person) distributed by the largest Korean province of Gyeonggi under the COVID-19 pandemic on household consumption using large-scale credit and debit card data from the Korea Credit Bureau. As the neighboring Incheon metropolitan city did not distribute stimulus payments, we employ a difference-in-difference approach and find that the stimulus payments increased monthly consumption per person by approximately 30 thousand KRW within the first 20 days. The overall MPC of the payments was approximately 0.40 for single families. The MPC decreased from 0.58 to 0.36 as the transfer size increased from 100-150 to 300-350 thousand KRW. We also find that universal payments had a very heterogeneous effect on different groups of people. The MPC for liquidity-constrained households, which account for 8% of residents, was close to one, but the MPCs of the other household groups were not significantly different from zero. The unconditional quantile treatment effect estimates reveal that there was a positive and significant increase in monthly consumption only on the lower part of the distribution below the median. Our results show that a more targeted approach may more efficiently achieve the policy goal of boosting aggregate demand.
Work in Progress
Can Monetary Policy Influence on Household Consumption through Housing Prices?: Empirical Analysis on Homeowner Balance Sheet Channel with Yejin Kim (Bank of Korea)
Under the circumstance of increasing concerns regarding debt deflation with a recent housing price decrease, this paper studies the impacts of a monetary policy shock such as a change in base rate of the central bank on household consumption through homeowner balance sheet channel ─ wealth effect and collateral effect. We estimate household consumption function using Korean Labor and Income Panel Data (2001-2012) with the instrument of housing supply in order to figure out the homeowner balance sheet channel in Korea, and find there is a significant effect of monetary policy through both wealth effect and collateral effect. Therefore, a central bank has to consider the homeowner balance sheet channel in addition to traditional monetary policy transmission mechanisms. Especially, the wealth effect shows a significant result across all income quantile groups whereas the collateral effect is significant in the low- and middle-income quantile groups, which implies the low- and middle-income quantile groups are more sensitive to the change in value of real estate assets. Thus, the monetary policy authority should take care of those groups in episode of housing price fall.
Under the circumstance of increasing concerns regarding debt deflation with a recent housing price decrease, this paper studies the impacts of a monetary policy shock such as a change in base rate of the central bank on household consumption through homeowner balance sheet channel ─ wealth effect and collateral effect. We estimate household consumption function using Korean Labor and Income Panel Data (2001-2012) with the instrument of housing supply in order to figure out the homeowner balance sheet channel in Korea, and find there is a significant effect of monetary policy through both wealth effect and collateral effect. Therefore, a central bank has to consider the homeowner balance sheet channel in addition to traditional monetary policy transmission mechanisms. Especially, the wealth effect shows a significant result across all income quantile groups whereas the collateral effect is significant in the low- and middle-income quantile groups, which implies the low- and middle-income quantile groups are more sensitive to the change in value of real estate assets. Thus, the monetary policy authority should take care of those groups in episode of housing price fall.