1.2 Literature Review
cycles. The price of assets will affect the households’ consumption through the wealth effect and liquidity constraint. At first, Bernanke and Gertler (1989) formalize the
“credit view” in a general equilibrium framework. In 1999, Bernanke, Gertler and Gilchrist use the new-Keynesian setup such as stick-price in the dynamic model.
Iacoviello (2005) follows their framework to establish a DSGE model to explain the interaction between asset price and economic activity. In the study of Iacoviello (2005), he chooses housing as the asset and adds two important dimensions to the literature on financial frictions and the macroeconomy, one is that firms and households both will be tied by real estate through the collateral constraints; and another is, nominal debt for a subset of the households. The reason why adding nominal debts is that, almost all debt contracts are in nominal terms in low-inflation countries. Two types of households are set through the different time preference.
Patient households, as the lenders, have higher discount rate; impatient households, as the borrowers, have lower discount rate. Iacoviello (2005) shows that debt-deflation which amplifies the demand shock but stabilizes the supply shock yields an improved tradeoff in output-inflation variances for the central bank. They also show that monetary policy’s response to asset prices dose not yield significant welfare gains.
In Iacoviello and Neri (2010), they use the DSGE model and explicitly model the price and the quantity of housing market. Also, they use Bayesian methods to estimate model parameters. To measure the spillovers from the housing market to the macroeconomy, their model captures two main features of housing. On the supply side, they add heterogeneous sectors, non-housing sector producer and housing sector producer respectively. On the other hand, on the demand side, housing enters
households’ utility, and can be used as a collateral for loans. Also, they generate the nominal rigidity and financing frictions in the household sector. Their research matches the observation that both housing prices and housing investment are strongly procyclical and sensitive to monetary shocks. In their conclusion, they find out that the spillovers from the housing market to the macroeconomy are through consumption.
Different from the collateral mortgage constraint setting in Iacoviello (2005), Chen and Cheng (2012) modify the model from Bernanke et al. (1999) and Aoki and Vlieghe (2004) to study the features of housing market in Taiwan and business cycles.
Following the assumptions in Bernanke and Gertler (1989), the capital and lending markets are incomplete markets, and the quantity of debts constrained by the net worth of entrepreneur. As a result, the financial accelerator can amplify the effect of monetary policy on the macroeconomic fluctuations under exogenous shocks, by the default risk premium which rise due to information asymmetry, and is the important transmission mechanism of business cycles. Chen and Cheng (2012) apply the external finance premium (EFP) to housing market. They find that under various exogenous shocks, the price of housing and the EFP of housing are negatively related.
The financial accelerator highlights the feature that the correlation between the EFP of housing and housing business cycles is also negative.
In Alpanda and Zubairy (2013), they build a closed-economy real model with owner-occupied and rental housing. In their model, similar to Iacoviello (2005), they feature borrowing and lending across heterogeneous household and financial frictions in the form of collateral constraints tied to house prices. They separate the households into three types: patient households (lenders), impatient households (borrowers) and renter households. Note that renter households’ problem is not intertemporal. They consume their disposable income every period. Furthermore, they include a rich set of
‧deduction, property tax deduction and depreciation allowance for rental income. The conclusion is that, they found that housing-related fiscal policies would potentially lead to a large decline in output in Canada. Especially the fiscal policies which are more broad-based would affect the output more, such as taxing imputed rents from owner-occupied housing or eliminating property tax deductions.
In Sami Alpanda and Sarah Zubairy (2014), they establish a closed-economy real model with owner-occupied and rental housing. Different from the research in Sami Alpanda and Sarah Zubairy (2013), they separate the households into just two types as in Iacoviello (2005). In their setting, mortgage loans are amortized over the long time, thus, one can differentiate between the flow and the stock of household debt. They consider the effects of monetary policy and fiscal policies to reduce the household debt-to-income ratio. The key point to differentiate effects of policies is that the policies apply to only new lending or to all existing mortgage debt. In their conclusion, monetary tightening is able to reduce the stock of mortgage debt, but lead to higher household debt-to-income ratio. The most effective and least costly policy to reduce household debt are tightening in mortgage interest deduction and regulatory loan-to-value (LTV) ratio, followed by increasing property tax rate and monetary tightening.
In this study, I follow the setting of Sami Alpanda and Sarah Zubairy (2013), and add the nominal rigidities and monetary policy. The main features in the study are that I use the data of Taiwan to calibrate the parameters and modify the model about the tax rule to let the model more fitting Taiwan’s situation. And I want to research that weather the fiscal policies or monetary policy can stabilize the fluctuation of the price of housing and lower the loan-to-GDP ratio.
We follow Alpanda and Zubairy (2013) to establish a DSGE model with three types of infinitely-lived households: patient households (savers), impatient households (borrowers) and renters. However, they assume the flexible price; we include nominal rigidity to evaluate the effects of monetary policy. As in Iacoviello (2005), the patient households and impatient households own the occupied housing, and the patient households own the rental housing as well. As in Kiyotaki and Moore (1997) and Iacoviello (2005), the impatient households’ borrowing is constrained by the collateral value that their housing provides.
2.1.1 Patient households
We consider an economy populated by patient households that have infinitely-lived and of measure one. The term “patient” captures the assumption that this kind of household has higher discount rate than other households as in Iacoviello (2005). The household sector has housing in their utility function, and maximizes the utility by and l determine the relative importance of housing and labor in the utility function