This thesis uses the widely used Dynamic Stochastic General Equilibrium (DSGE) framework of 'borrowers' and 'savers', where household borrowers pledge their houses as collateral, to examine the effects of housing market shocks, subject to different labour market arrangements (in Chapter 1) and different banking sector characteristics (in Chapter 2). In chapter 1, we use the above borrower-saver framework with price rigidity, an endogenous probability of mortgage default and a fixed supply of housing to compare, (i) the impact of separable and non-separable household utility functions on labour supply and (ii) the implications of two independent labour supplies, (individually for savers and borrowers), as commonly used in the literature, to a single labour supply represented by one union. We find that, compared to standard separable preferences that are commonly used in the literature, non-separable preferences imply that the savers' employment falls by less on impact because the wealth effect on their labour supply decision is smaller. Separable preferences imply that borrowers' employment increases on impact, while non-separable preferences imply that their employment decreases. Compared to the case of two independent labour supplies, (with standard separable preferences) a single union labour supply generates a smaller fall in the savers' employment on impact. For the borrowers, whose employment usually increases with housing market shocks when there are two individual labour supplies (for borrowers and savers), a single union labour supply produces a fall in their employment on impact. This change in the direction of employment has serious repercussions on other macro variables as it amplifies the fall in aggregate consumption. In chapter 2, we consider a borrower-saver model with production in housing, nominal rigidities in both price and wages, an endogenous probability of mortgage default and a mortgage risk shock to investigate the welfare implications of (i) sticky retail bank interest rates and (ii) market power in banking, under a standard Taylor rule and with optimal macroprudential policy. We find that sticky retail bank interest rates and monopolistic banking have redistributive welfare effects between the savers and the borrowers. We also find that, under the assumption of both sticky retail bank interest rates and monopolistic banking, the optimal capital requirement ratio is more lenient than the benchmark case of a 10.5% capital requirement ratio (Basel III), and results in the borrowers benefiting at the expense of the savers. In the presence of flexible retail bank interest rates and monopolistic banking, it is optimal to have a tighter macroprudential policy than the baseline capital requirement ratio of 10.5%, but again the borrowers gain at the expense of the savers. Finally, in an economy with both flexible retail bank interest rates and competitive banking, the optimal capital requirement ratio is lower than the 10.5% used in the benchmark model, and it is Pareto improving.
|Date of Award||31 Dec 2021|
- The University of Manchester
|Supervisor||George Bratsiotis (Supervisor) & Michele Berardi (Supervisor)|