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Perspectives on “marginal crisis risk” and “leaning against the wind” from the capital structure of housing investments

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Purpose – The purpose of this paper is to relate the marginal crisis risk of Woodford to a number of
financial fragility indicators. The paper expands the interest rate gap approach by considering the
capital structure of investments and systemic risk, dating back to Modigliani-Miller. The model allows
for distinct impacts from asset inflation, leverage as well as incentives for speculative investments for
a central bank that aims to lean against the wind.
Design/methodology/approach – Framed in terms of the housing market and household
behaviour, the paper sets out an augmented loss function which takes a number of financial
fragility indicators into account. By moving beyond the case where all risk increasing mechanisms are
driven by external monetary policy shocks, the approach shows why a central bank should be inclined
to lean against the wind even in the absence of interest rate gaps.
Findings – Taking the return to equity into account, and moving beyond the case where all risk
increasing mechanisms are related to external monetary policy shocks, the paper shows why a central
bank might be inclined to lean against the wind even in the absence of interest rate gaps. The
context-specific nature of the monetary transmission mechanism in general, and the structure of
the risk taking channel more specifically, calls for both internal financial market features as well as the
link between financial markets and the real economy to impact on how and when to lean.
Originality/value – There seems to be increased awareness of the need to take financial stability
considerations in monetary policy. In fact, Woodford argues that the balance between financial stability
objectives and price and output stability is part of the choice when choosing between alternative short
run paths for monetary policy. By taking a conventional approach to the capital structure of
investments, this paper integrates asset inflation, leverage and incentives for speculation into a central
bank’s loss function in a way that to the best of the author’s knowledge is novel.

Keywords Household, Fiscal policies and behaviour of economic agents, Public economics,Monetary policy, Central banking and the supply of money and credit,Macroeconomics and monetary economics, Central banks and their policies, Central banks, Fiscal policy,ousing

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Informasi Detail

Judul Seri

Journal of Financial Economic Policy

No. Panggil

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Penerbit

: Emerald Group., 2014

Deskripsi Fisik

Journal of Financial Economic Policy Vol. 5 No. 3, 2013 pp. 272-280

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

EKONOMI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

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