US Monetary Policy and the G7 House Business Cycle: FIML Markov Switching Approach

Transcription

1 U Monear Polc and he G7 House Busness Ccle: FML Markov wchng Approach Jae-Ho Yoon 5 h Jul. 07 Absrac n order o deermne he eec o U monear polc o he common busness ccle beween housng prce and GDP n he G7 counres U.. U.K. Canada German France al and Japan hs paper adoped FML Markov-swchng model o Yoon 006. he paper showed a posve relaonshp beween U neres rae and G7 GDP growh. U neres rae s a sgncan varable o he common busness ccle beween housng prce and GDP n he G7 counres. HoweverU neres rae showed a sgncan eec o he G7 house busness ccle or small shock perods no exremel large shocks perods. hs paper also ound no relaonshp beween U m growh and he GDP growh rae o he G7 counres. U m growh s no a sgncan varable o he common busness ccle beween housng prce and GDP n he G7 counres. Kewords: neres rae m housng prce GDP FML Markov-swchng model busness ccle G7 U.. U.K. Canada German France al Japan JEL Classcaons: C3; C3 hank Geraldne Dan parcpans a he nernaonal Assocaon or Appled Economercs apporo 07 or helpul commens. hs paper was acceped o presen a he oce or Economc Measuremen hp://sem.soce.cmu.edu/m.hml Jul M Cambrdge Massachuses and ngapore Economc Revew Conerence hp:// Augus ngapore and Mone Macro and Fnance Annual Conerence hp://ses.google.com/se/mmconerences/annualconerence ep Kng s College London London. also hank Lee-Jung and Eun-Jung or suggesons Moble: E-mal: beowulkorea@gmal.com. Webse: hp://ses.google.com/se/beowulkorea/

2 . nroducon Yoon and Lee 04 showed ha he G7 housng prce has a procclcal movemen wh GDP durng he ol shock perods o he 970s 80s 90s and he bursng o housng bubble n 008 usng FML Markov-swchng model o Yoon o he relaonshp beween U monear polc and house prces has been assumed o be posve durng shock perods. Plamen ossov Marn Čhák and Amar hanghav 008 showed ha he shor-erm neres rae has a szable mpac on resdenal housng prces. Lasrapes W. D. 00 showed ha mone suppl shocks have real eecs on he housng prces. However Denz gan and Prakash Loungan 0 ound ha long-run house prce dnamcs are mosl drven b local undamenals such as ncome and he eec o more globall conneced acors such as neres raes appears o be less srong. Ò scar Jordà Morz chularck Alan M. alor 05 dsagree over neres raes ncrease o curb asse prce booms. Lucas R. E. Jr. 996 showed ha monear polc s neural. hereore hs paper examned wheher here reall s a posve relaonshp beween U monear polc and he G7 house busness ccle o esablsh a relaonshp beween U monear polc and he G7 house busness ccle we adoped he ull normaon maxmum lkelhood FML Markovswchng model o Yoon hs paper ound ha U neres rae s a sgncan varable o he G7 GDP and he G7 house busness ccle. However U Δm has no sgncan eec o he G7 busness ccle beween housng prce and GDP n he G7 counres. he paper has been dvded n our secons. econ presens he FML Markov-swchng model. econ 3 presens he eec o U. monear polc usng FML Markov-swchng model. econ 4 concludes hs paper.. FML Markov-swchng model n order o esmae he parameers o he Markov-swchng model n he smulaneous equaons conssenl we consder he ollowng FML Markovswchng model: YBs Zs U U.. d. N0 ~ where Y s he M marx o onl dependen varables; B s an M M marx and s nonsngular; Z s he K marx o predeermned varables; Γ s a K M

3 3 marx and rankz = K; and Us s he M marx o he srucural dsurbances o he ssem. Consequenl he model has M equaons and observaons. M M M M M M U U E ' Pr p wh N p or all. o derve he FML Markov-swchng model n he smulaneous equaons we can oban Pr b applng a Hamlon ler 989 as ollows: ep : A he begnnng o he h eraon Pr N 0 s gven and we calculae Pr Pr N N Pr Pr where Pr N 0 N 0 are he ranson probables. ep : Consder he on condonal dens o and unobserved varable = whch s he produc o he condonal and margnal denses: Pr rom whch he margnal dens o s obaned b: N Pr N where he condonal dens s obaned rom : ' exp de de / / M s z Bs s z Bs Bs where ' s Z YBs s Z YBs s he h row o he Y marx z s he h row o he Z marx and B and Γ are obaned rom.

4 ep 3: Once s observed a he end o me we updae he probabl erms: Pr Pr Pr As a bproduc o he ler n ep we oban he log lkelhood uncon: lnl ln whch can be maxmzed wh respec o he model parameers. 3. U monear polc usng FML Markov-swchng model Le us consder he quarerl real GDP Housng Prce ndex 3 Consumer Prce ndex 4 n he G7 counres. We added U monear polc varables 4 o he FML Markov-swchng model. H C M e 3 Y us us us us Y uk Huk Cuk M e uk 4 Y r H r C r M e r 5 Y de Hde Cde M e de 6 Y H C M e 7 Y ca H ca Cca M e ca 8 Y p H p C p M e p 9 We obaned he G7 quarerl real GDP rom he OECD daabase hp://sas.oecd.org/ 3 ource: Naonal sources B Resdenal Proper Prce daabase hp:// 4 We obaned Federal Funds rae and m rom FRED daabase hp://red.sloused.org/ 4

5 where ΔY s he log derenced real GDP. ΔH s he log derenced housng prce n he G7 counres. ΔC s he log derenced consumer prce n he G7 counres. M s ederal unds rae or he log derenced m able : MLE o he FML Markov-swchng model 970. o 06.V Parameers 0 us us uk uk r r de de ca ca p p us us uk uk r r de de ca ca p p us

6 us uk uk r r de de ca ca p p us uk r de ca p q p us us Δ m us us us uk Δ m us uk us r Δ m us r us de Δ m us de us Δ m us us ca Δ m us ca us p Δ m us p Log Lkelhood andard errors o he parameers esmaes are repored n he parenheses able gves he esmaes rom he FML Markov-swchng model usng quarerl daa or 970: o 06:V. he coecen s sgncan and posve correlaed durng regme perods. he posve coecen showed he comovemen beween G7 housng prce and G7 GDP durng regme perods. he coecen β showed an upward sh durng regme perods and he degree o he upward movemen s obvous because β > β 0 excep Japan. Japan has been Zombe econom more han 5 ears aer housng bubble collapse n 989. he eld o house 6

7 prce H s more unsable han he growh rae o G7 GDP Y because absolue values o are smaller han. he varance σ 0 s sgncan and he varance σ s also sgncan. he varance showed large volal durng regme perods because σ > σ 0. he coecen neres rae Federal Funds rae s sgncan and posve. However he coecen Δm s no sgncan. Fgure shows ha he nernaonal common smoohed probables Pr Y mach he ol prce shock perods durng 970s 80s and 90s well. n addon here were common busness ccles durng he savngs and loan &L crss 986:V o 988: and he housng bubble burs 008: o 009:. Fgure. Common probables 5 o regme Pr Y n he G7 counres: U.. U.K. France German al Canada Japan 970: o 06:V G7_PROB_P he resuls n able and Fgure gve evdence o a common nernaonal busness ccle beween housng prces and GDP oupu wh large shocks. Especall exremel large shocks such as ol shocks cause procclcal housng prce movemen wh GDP ncludng he bursng o housng bubble n 008. o exam he eec o U monear polc and he G7 house busness ccle we adoped he lkelhood rao es LR es whch compared he goodness o o wo models n able. he LR compared o a crcal value o decde wheher o reec he null model n avor o he alernave model n able. 5 For smoohed probables we ollowed Km s algorhm

8 LR log L log L 0 where log L s a log lkelhood o he null model log L s a log lkelhood o he alernave model he es sasc LR s wll be asmpocall ch-squared dsrbuon wh degrees o reedom. able : he resuls o lkelhood rao es LR es Monear polc varables Federal unds rae 63.64** Δm 0.8 ============================================================== * 5% sgncance level ** % sgncance level From he resuls o LR es n able we can ound ha a posve relaonshp beween U neres rae and G7 GDP growh. However here s no relaonshp beween U Δm growh and he GDP growh rae o he G7 counres. We also have same resuls rom he values o U neres rae and Δm n able. Fgure. Common probables o regme Pr Y ncludng neres rae G7_PROB_N_P 8

9 Fgure 3. Common probables o regme Pr Y ncludng Δm G7_PROB_M_P We can ound ha Pr Y ncludng U neres rae n Fgure s a lle b deren rom Pr Y n Fgure. From Fgure we can ound ha U neres rae s a sgncan varable o he common busness ccle beween housng prce and GDP n he G7 counres. Especall neres rae showed a sgncan eec o he G7 house busness ccle or small shock perods such as he lae 990s. However neres rae polc showed no sgncan eec o he G7 house busness ccle or exremel large shocks such as ol shocks n 970s and he bursng o housng bubble n 008. hs resul s deren orm Denz gan and Prakash Loungan 0 who nssed he eec o neres raes less srong. Pr Y ncludng Δm n Fgure 3 s no deren rom Pr Y n Fgure. From Fgure 3 we can nd ha Δm s no a sgncan varable o he common house busness ccle. 4. Concluson Applng a FML Markov-swchng model o he G7 counres we ound ha he housng prce movemen was procclcal wh GDP durng he ol shock perods o he 970s 80s and 90s and he bursng o housng bubble n 008 hs paper also ound ha U neres rae s a ver mporan ool o he relave small shocks. However U neres rae s no workng well or he exremel large shocks such as he bursng o housng bubble n 008 9

10 Reerences Denz gan and Prakash Loungan 0 Global housng ccles MF workng paper /7 Hamlon J.D. 989 A new approach o he economc analss o nonsaonar me seres and he busness ccle Economerca Hamlon J.D. 994 me eres Analss Prnceon Unvers Prnceon N.J. Karl E. Case John M. Qugle and Rober J. hller. 005 Comparng Wealh Eecs: he ock Marke vs. he Housng Marke Advances n Macroeconomcs Km C.J. 994 Dnamc acor models wh Markov swchng Journal o Economercs Km C.J. and Nelson C.R. 999 ae-space models wh regme swchng: Classcal and Gbbs samplng approaches wh applcaons M Press Cambrdge Lasrapes W. D. 00 he real prce o housng and mone suppl shocks: me seres evdence and heorecal smulaons Journal o Housng Economcs Lucas R. E. Jr. 996 Nobel Lecure: Monear Neural Journal o Polcal Econom Plamen ossov Marn Čhák and Amar hanghav 008 neres Rae Elasc o Resdenal Housng Prces MF workng paper 08/47 Ò scar Jordà Morz chularck Alan M. alor 05 neres Raes and House Prces: Pll or Poson? FRBF Economc Leer 5 Yoon J.H. 006 he co-movemen o nlaon and he real growh o oupu he Journal o he Korean Econom Yoon J.H. 009 mulaneous equaons n he Markov-swchng model Far Eas and ouh Asa Meeng o he Economerc oce oko Yoon J. H. and Lee J. H. 04 he Lnked Movemen o House Prces and GDP n he G7 Counres he Korea paal Plannng Revew