A New angle on excess consumption volatility in emerging countries: Does house price matter?

Abstract

This paper focuses on house prices in order to explain excess consumption volatility, which is one of the stylized facts of the business cycle observed in emerging countries. The relative consumption volatility compared to output volatility is higher in emerging countries than in rich countries. Because house prices in emerging countries are more volatile than in advanced countries, this paper suggests a new angle focusing on relationship between house price fluctuation and excess consumption volatility. To begin, I construct a cross-country dataset, and suggest new evidence that house prices are more correlated with consumption in the case of emerging countries compared to rich countries while the correlation between house prices and output are similar between two country groups. Then, I build business cycle models given exogenous house price and output processes in order to explain excess consumption volatility puzzle. The results of the models suggest that high house price volatility in emerging countries causes their excess consumption volatility and that the mechanisms behind it are housing collateral effects and rental price pass-through. The former is related to the borrowing capacity affected by house price changes, and the latter is related to the link between house prices and housing consumption volatility.