Emory Report
September 19, 2005
Volume 58, Number 4


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September 26 , 2005
Chirinko says home prices at heart of U.S. economy

BY diana drake

In an August article on Bankrate.com, the online resource of financial rate information for consumers, financial expert Greg McBride said the run-up in home prices in many markets around the country makes it a matter of when and where—not if—the housing bubble will burst.

Such bubbles, while perhaps precarious, are fascinating to Robert Chirinko, Winship Distinguished Research Professor of Economics in Goizueta Business School, who, along with colleagues Leo de Haan of the Dutch National Bank and Elmer Sterken of the University of Groningen, explore the effect of house and stock prices on the macroeconomy in their paper, “Asset Price Shocks, Real Expenditures and Financial Structure: A Multi-Country Analysis.”

“Housing prices can go up and down, but does that really affect our consumption behavior?” Chirinko said. “The stock prices for firms go up and down, but does that really affect investment behavior? These are what economists call real questions, the real goods and services that affect things like Gross Domestic Product.”

Chirinko’s paper examines the response of economies in 11 European Union countries, Japan and the United States to movements in home and stock prices. With support from the Dutch National Bank, which already had collected an abundance of related economic data, Chirinko and his colleagues explore the overarching question of whether or not financial markets have real effects on 13 different economies.

“When you look at just one country, a lot of things are happening at any given time,” Chirinko said. “Say we are studying housing prices in the United Kingdom and their effect on the real economy; the recent London bombings are obviously going to affect people’s psyches, their consumption spending and so on. But by taking more or less the same statistical specifications and applying them to many different economies, if we still find a systematic response despite country specific shocks, we’re comfortable that we have in fact found a solid pattern.”

The authors examined housing and equity prices from 1979–98 in Austria, Belgium, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, United Kingdom and the United States. Ultimately, the impact of home and stock prices varied a great deal across the 13 advanced economies, yet the research drew some important conclusions.

“Financial markets do have real effects, which is a broad conclusion across many of these industrialized countries that we look at,” Chirinko said. “Movements in housing prices have much bigger effects than those from the stock market. We attribute this important difference to the fact that households have less access to financial markets. When we get a windfall from a rise in the price of our house, we tend to then go out and spend. The opposite is also true. If there’s a fall in the price, we tend to cut back or not go on vacation.”

Chirinko said the study highlights the important role played by asset prices on real activity, and its results fuel the debate about including asset prices in the formulation of monetary policy.

The implications of the research pertain more to monetary policy, he said, than to practical tools for business managers—the Federal Reserve should care quite a bit about the movements of these markets and the impact of those movements. In the United States, this harkens back to the current housing bubble that some believe has swelled to nightmare proportions.

“Monetary policy makers are going to take into account what is happening in these asset markets,” Chirinko said. “There is quite a lot of concern about the housing bubble in the U.S., and our paper suggests housing prices have a major impact on the economy. All else being the same, the Federal Reserve should take a long hard look at what is happening in the housing markets and may wish to adjust its monetary policy accordingly.”

This article first appeared in Knowledge@Emory, Goizueta Business School’s electronic newsletter, and is reprinted with permission.