Abstract
This paper studies the housing sector of Hong Kong and the role of collateral constraint in modelling Hong Kong economy, through the lens of a small open economy DSGE model with a currency board exchange rate commitment. By estimating and evaluating the model by Indirect Inference over the sample period of 1994Q1–2018Q3, it is found that the collateral model can match data behaviour. Comparing with the tests generated from the model without collateral, collateral model can match the housing price data better, while the model without collateral fits the general price better. Since collateral constraint acts like an additional transmission channel, it enhances the impact from shocks and housing price is highly determined by housing demand. We further investigate LTV policy, finding it could be applied as macroprudential policy, especially when addressing the problem caused by increase in the US interest rate and the burst in the domestic housing demand, but the government should watch closely to the crowding out effect from export to housing demand and housing investment.
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