Tuesday 17th January 2012 – 14:15 to 15:15

Speaker: John Muellbauer (University of Oxford and CEPR)

The main objectives of this paper, co-authored with John Duca and Anthony Murphy of the Dallas Federal Reserve are

1. To better understand interactions between the financial sector and the real economy;

2. To explain the secular decline in US saving rate as well as its fluctuations;

3. To better understand the role of the household sector in creating potential financial instability.

4. To develop a framework for interpreting data on the growth of credit, money and asset prices -crucial for central banks.

5. To better handle major evolutionary structural change in econometric modelling.

We develop a multiple equation system for consumption, the rate of mortgage refinancing and other variables in which a latent variable common to all the equations captures shifts in mortgage market architecture, while data from the Fed’s bank lending survey tracks shifts in the availability of unsecured credit. The latent variable not only shifts the mean of each dependent variable but interacts with key variables, implying shifts in betas ignored by standard models.

Part of the OMI Seminar Series