September 19, 2005
58, Number 4
September 26 , 2005
says home prices at heart of U.S. economy
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
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
“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.