ADBI Working Pper Series Rel Estte Vlution, Current Account, nd Credit Growth Ptterns Before nd After the 2008 2009 Crisis Joshu Aizenmn nd Yothin Jinjrk No. 429 July 2013 Asin Development Bnk Institute
Joshu Aizenmn is Robert R. nd Ktheryn A. Dockson Chir in economics nd interntionl reltions t the University of Southern Cliforni. Yothin Jinjrk is reserch fellow t ADBI. The views expressed in this pper re the views of the uthor nd do not necessrily reflect the views or policies of ADBI, the ADB, its Bord of Directors, or the governments they represent. ADBI does not gurntee the ccurcy of the dt included in this pper nd ccepts no responsibility for ny consequences of their use. Terminology used my not necessrily be consistent with ADB officil terms. The Working Pper series is continution of the formerly nmed Discussion Pper series; the numbering of the ppers continued without interruption or chnge. ADBI s working ppers reflect initil ides on topic nd re posted online for discussion. ADBI encourges reders to post their comments on the min pge for ech working pper (given in the cittion below). Some working ppers my develop into other forms of publiction. Suggested cittion: Aizenmn, J., nd Y. Jinjrk. 2013. Rel Estte Vlution, Current Account, nd Credit Growth Ptterns Before nd After the 2008 2009 Crisis. ADBI Working Pper 429. Tokyo: Asin Development Bnk Institute. Avilble: http://www.dbi.org/workingpper/2013/07/23/5805.rel.estte.vlution.fter.2008.2009.crisis/ Plese contct the uthors for informtion bout this pper. Emil: izenmn@usc.edu; yjinjrk@dbi.org Asin Development Bnk Institute Ksumigseki Building 8F 3-2-5 Ksumigseki, Chiyod-ku Tokyo 100-6008, Jpn Tel: +81-3-3593-5500 Fx: +81-3-3593-5571 URL: www.dbi.org E-mil: info@dbi.org 2013 Asin Development Bnk Institute
ADBI Working Pper 429 Aizenmn nd Jinjrk Abstrct This pper explores the stbility of the key conditioning vribles ccounting for rel estte vlution before nd fter the crisis of 2008 2009, in pnel of 36 countries, for the period of 2005:I 2012:IV, recognizing the incidence of globl finncil crisis. Our pper vlidtes the robustness of the ssocition between the rel estte vlution of lgged current ccount ptterns, both before nd fter the crisis. The most economiclly significnt vrible in ccounting for rel estte vlution chnges turned out to be the lgged rel estte vlution pprecition (rel estte infltion minus consumer price index [CPI] infltion), followed by chnges in the current ccount deficit/gross domestic product (GDP), domestic credit/gdp, nd equity mrket vlution pprecition (equity mrket pprecition minus CPI infltion). The first three effects re economiclly substntil: one stndrd devition increse in lgged rel estte pprecition is ssocited with 10% increse in the present rel estte pprecition much lrger thn the impct of one stndrd devition increse in the current ccount deficit (5%) nd of the domestic credit/gdp growth (3%). Thus, the results re supportive of both current ccount nd credit growth chnnels, with the niml-spirits nd momentum chnnels plying the most importnt role in the boom nd bust of rel estte vlution. JEL Clssifiction: F15, F21, F32, R21, R31
ADBI Working Pper 429 Aizenmn nd Jinjrk Contents 1. Introduction nd Overview... 3 2. Smple... 5 2.1 Preliminry Sttistics... 5 2.2 Ptterns of Rel Estte Vlution Apprecition nd Current Account Deficit/Gross Domestic Product... 6 3. Bseline Results...11 3.1 Globl Finncil Crisis...11 3.2 Breks in Current Account Deficits nd Domestic Credit Growth...13 3.3 Current Account Deficit vis-à-vis Domestic Credit Growth...15 4. Sensitivity Anlysis...17 4.1 Reverse Feedbck...17 4.2 Asymmetric Adjustment...19 4.3 Economic Significnce...21 5. Concluding Remrks...24 References...25 Appendix A: Qurterly Dt, 2005:I 2012:IV...26 Appendix B: Voltility of Rel Estte Vlution...27 Appendix C: Pnel Unit Root nd Co-Integrtion Tests...28
ADBI Working Pper 429 Aizenmn nd Jinjrk 1. INTRODUCTION AND OVERVIEW The globl crisis of 2008 2009 sprked vibrnt debte on the fctors contributing to the crisis. Were globl imblnces or excessive credit growth the key suspects? Contributors to the debte include Borio nd Disytt (2011), conjecturing tht the min cusl fctor for the finncil crisis ws not excess sving but the excess elsticity of the interntionl monetry nd finncil system; nd Obstfeld (2012:20), noting tht The blnce sheet mismtches of leverged entities provide the most direct indictors of potentil instbility, much more so thn do globl imblnces, though the imblnces my well be symptom tht deeper finncil threts re gthering. Aginst this bckground, we revisit these questions in the context of the rel estte mrket. The mcro importnce of the rel estte mrket is well pprecited. A prime exmple of it hs been the United Sttes (US), where the title of Lemer (2007) summed it up: Housing is the business cycle. A priori, one expects tht both the current ccount nd credit growth trends would impct the vlution of ntionl rel estte. A primry link between rel estte vlution nd the current ccount deficit follows from ntionl ccounting nd the bsorption pproch. Growing current ccount deficits re signl of growing gp between the spending of domestic residents (bsorption) nd their output. As long s the demnd for key non-trded durble ssets, like rel estte, is positively correlted with bsorption, one expects higher current ccount deficits to be ssocited with higher rel estte vlution. Yet, s most households co-finnce the purchse of their dwelling through the bnking system, greter finncil depth nd n ccelerted credit growth rte tend to increse the demnd for houses, probbly incresing rel estte vlution. Thus, one expects tht both current ccount nd credit trends mtter for the vlution of rel estte, nd there is no obvious reson to surmise which of the two should dominte. In Aizenmn nd Jinjrk (2009), we looked empiriclly t these issues in 41 countries, over 1990 2005, investigting the ssocition between lgged current ccount deficits nd pprecition of rel estte prices/gross domestic product (GDP) defltor, controlling for mcro fctors ssocited with rel estte vlution (lgged GDP per cpit growth, infltion, finncil depth, institution, urbn popultion growth, nd the rel interest rte). We found strong positive ssocition between lgged current ccount deficits nd pprecition of the rel estte, where the rel pprecition is mgnified by finncil depth, nd mitigted by the qulity of institutions. Intriguingly, the economic importnce of current ccount vritions, in ccounting for the rel estte vlution, exceeds tht of the other vribles, including the rel interest rte nd infltion. A growing literture identified severl relted chnnels contributing to the positive ssocition of the current ccount nd credit growth ptterns with rel estte vlution. Tomur (2010) nlyzed the roles of credit mrket conditions in the endogenous formtion of housing-mrket boom bust cycles, in business cycle model. When households re uncertin bout the durtion of temporry high-income growth period, expected future house prices rise during high-growth period nd fll t the end of the period. These developments induce in his model expecttion-driven boom bust cycles in house prices, only if the economy is open to interntionl cpitl flows. Furthermore, high mximum lon-to-vlue rtios for residentil mortgges per se do not cuse boom bust cycles without interntionl cpitl flows. Libson nd Mollerstrom (2010) noted tht ntionl sset bubbles my explin the interntionl imblnces the bubbles rised consumption, resulting in lrge trde deficits. In their smple of 18 countries of the Orgnistion for Economic Co-opertion nd Development (OECD) plus the People s Republic of Chin (PRC), movements in house prices lone explin hlf of the vrition in trde deficits. Gete s (2010) model showed tht incresed demnd for housing my 3
ADBI Working Pper 429 Aizenmn nd Jinjrk generte trde deficits without the need for welth effects or trde in cpitl goods, nd tht housing booms re lrger if the country cn run trde deficit. These predictions were found consistent with the pre-crisis experience of the OECD countries. Adm, Kung, nd Mrcet (2011) outlined n open economy sset pricing model with households chrcterized by subjective beliefs bout price behvior nd updted these beliefs using Byes rule. They show tht the resulting belief dynmics propgte considerble economic shocks nd contribute to replicting the empiricl evidence of the ssocition between current ccount ptterns nd rel estte vlutions. Belief dynmics cn temporrily de-link house prices from fundmentls, so tht low interest rtes cn fuel house price boom. As there is no reson for the reltive importnce of the current ccount nd the credit ptterns to sty stble over time in ccounting rel estte vlution, we explore in this pper the degree to which the ptterns before the globl crisis continue to hold fter the crisis. Specificlly, we look t the following questions: 1. Stbility of the key conditioning vribles ccounting for the rel estte vlution before nd fter the crisis specificlly, the reltive importnce of the current ccount nd credit growth ptterns. 2. The importnce of momentum in the pricing of rel estte, s mesured by the impct of lgged rel estte pprecition in ccounting for the present rel estte pprecition, controlling for other mcro fctors. This issue is relted to concerns bout possible bubble dynmics, where lgged pprecition is reinforcing expecttions of future pprecition. 3. Symmetry of the ptterns during rel estte pprecition versus rel estte deprecition. 4. The possible two-wy cuslity between current ccount nd rel estte vlution ptterns. 5. The degree to which the vlution of equities is ccented by similr conditioning vribles. Overll, our pper revels complex of time vrying ptterns, yet it vlidtes the robustness of the ssocition between rel estte vlution of lgged current ccount ptterns both before nd fter the crisis. The bse regression is dynmic pnel estimte of 36 countries, during the periods 2005:I 2012:IV, recognizing the crisis brek. It ccounts for the pprecition rte of the rel estte vlution (rel estte infltion minus consumer price index [CPI] infltion) s explined by the following correltes: lgged pprecition rte of the rel estte vlution, lgged chnges in the current ccount/gdp, lgged chnges in the domestic credit/gdp, lgged chnges in the equity mrket vlution pprecition (equity mrket pprecition minus CPI infltion), nd vector of lgged chnges of mcro controls (infltion, growth of industril production, TED spreds, sovereign spreds, VIX, nd interntionl reserves). The most economiclly significnt vrible in ccounting for rel estte vlution chnges turned out to be the lgged rel estte vlution pprecition, followed by current ccount deficit/gdp, domestic credit/gdp, nd equity mrket vlution pprecition. The first three effects re economiclly substntil: one stndrd devition increse in lgged rel estte pprecition is ssocited with 10% increse in the present rel estte pprecition, much lrger thn the impct of one stndrd devition increse in the current ccount deficit (5%) nd tht of domestic credit/gdp growth (3%). Thus, the results re supportive of both current ccount nd credit growth chnnels, with the niml-spirits nd expecttions chnnels plying the most importnt role in the boom nd bust of rel estte vlution. While positive reverse feedbck of rel estte pprecition to current ccount deficit cnnot be ruled out theoreticlly, we find tht it is not supported during our smple period. We find support 4
ADBI Working Pper 429 Aizenmn nd Jinjrk for positive feedbck of rel estte pprecition to equity mrket pprecition, which is consistent with the welth effects from rel estte vlution to equity investment. 2. SAMPLE We use qurterly dt to understnd how short- to medium-term djustment of the rel estte vlution intercts with current ccounts, domestic credit, nd relevnt mcro nd globl vribles. Using qurterly dt comes t cost of smple length subject to dt vilbility, our dt covers the period of 2005:I 2012:IV. Obviously, we miss out erlier episodes of rel estte booms nd busts. However, in the context of our investigtion this my not be so costly since previous cycles would vry cross countries, mening tht vriety of other fctors would drive country-specific episodes. On the other hnd, the current smple period fits well with our interests, which focus on rel estte vlution during the globl crisis, with qurterly djustment dynmics. Alterntively, using nnul dt insted would llow for longer smple period in the historicl pst, but could not cpture the dynmics of short- to medium-term interctions between rel estte dt nd confounding mcro fundmentls tht we try to understnd. The dt re drwn from severl sources, s shown in Appendix A, including Oxford Economics, Economist Intelligence Unit (EIU), Federl Reserve Economic Dt (FRED), nd Credit Mrket Anlysis (CMA). Our min vrible of interest is rel estte vlution pprecition (rel estte infltion minus CPI infltion). As user of secondry dt, we re mde well wre tht the primry collection method of our most importnt vrible, the rel estte vlution series, is known to be highly heterogeneous cross countries. Ntionl sttisticl offices nd locl rel estte gencies hve their own pproches in compiling the dt, e.g., some re repeted sles, others re not; some include both residentil nd commercil, others do not. Hence, pooling rel estte series cross countries mounts to n ggregtion problem. Our rel estte series, which re drwn from compiltion of the Oxford Economics dtbse, re lso subject to this dt issue, s is the cse in erlier studies nd dt sets. 1 Yet, s is shown in Aizenmn nd Jinjrk (2009) using rel estte dt from different cross-country dtbses, residentil series, nd commercil rel estte series, the econometric evidence is lrgely consistent cross the dt sets on the empiricl reltionships of rel estte, current ccount, nd mcro vribles. Altogether, 36 countries re in the smple, covering both developed nd emerging mrkets. Appendix A provides the list of countries nd Appendix B shows geogrphiclly the loction of rel estte mrkets included. Some of these re lrge, hot spot mrkets, widely monitored nd publicized by the press, e.g., the PRC nd the US, wheres mny others re smller in size nd my not be known s boom bust spots in the globl rel estte mrkets. As shown by stndrd devition of rel estte vlution pprecition highlighted in the figure of Appendix B, severl of these countries re considered highly voltile mrkets for the period before nd fter the globl crisis. 2.1 Preliminry Sttistics Pnel unit root tests suggest tht rel estte vlution pprecition, current ccount deficit/gdp, nd domestic credit growth/gdp re ll non-sttionry. As the power of unit root 1 The cross-country series currently vilble re not sufficiently detils to resolve the issues, s well s in term of cross-series comprbility, in contrst to, for exmple, Stndrd nd Poor s (S&P)/Cse-Shiller for the US rel estte series. 5
ADBI Working Pper 429 Aizenmn nd Jinjrk tests undoubtedly vries cross study smples, not to mention pnel dt extension of the tests, we report both the Im-Pesrn-Shin sttistic nd Levin-Lin sttistic (Appendix C). These two tests ssume tht ll series re non-sttionry under the null hypothesis; the former is consistent under the lterntive tht only frction of the series re sttionry, while the ltter ssumes tht ll series re sttionry under the lterntive. Both tests pper consistent with ech other in our smple, pointing to the existence of pne unit roots in the series. Next, we exmine whether there is ny co-integrting reltionship mong these vribles.2 The pnel co-integrtion test does not reject the null of no co-integrtion between rel estte vlution pprecition nd current ccount deficit/gdp; rel estte vlution pprecition nd domestic credit growth/gdp; rel estte vlution pprecition nd equity mrket vlution pprecition (equity mrket pprecition minus CPI infltion); nd current ccount deficit/gdp nd domestic credit growth/gdp. The pnel co-integrtion test sttistics hve the null of no integrtion for ll cross-sections of countries, bsed on Westerlund pnel error correction model (ECM) tests. We report test sttistics both when n lterntive is error correction term less thn zero for t lest one country, nd when n lterntive is error correction term less thn zero for ll countries. Both sttistics re consistent with ech other in rejecting co-integrtion. While there is some wek evidence of co-integrtion between current ccount deficit/gdp nd domestic credit growth/gdp, this is not sttisticlly significnt t the 5% level of the test. Bsed on the pnel unit-root nd pnel co-integrtion tests, the ppliction of dynmic pnel dt estimtion in first-differenced series is deemed necessry for the rel estte nd mcro vribles in our smple. With 36 countries nd over 20 qurterly periods for ech country, the fixed-effect estimtion my lso be pplicble. However, given tht severl series re known to be highly persistent in the pnel of countries (i.e., rel estte prices, current ccounts, domestic credit growth, s well s equity prices), the inclusion of lgged terms of dependent vribles on the right-hnd side of estimting equtions my entil empiricl correltion between the lgged regressors nd the error terms, nd hence the endogeneity issue. For these resons, we focus in the following on coefficient estimtes from dynmic pnel estimtion s our min econometric evidence. 2.2 Ptterns of Rel Estte Vlution Apprecition nd Current Account Deficit/Gross Domestic Product Men reversion in rel estte pprecition cross ntionl mrkets is quite noticeble in the dt. As shown in Figure 1, we plot cumultive rel estte vlution pprecition for the period of 2005:I 2007:III on the horizontl xis, nd cumultive rel estte vlution pprecition for the period of 2008:III 2012:IV on the verticl xis. The reltionship between cumultive rel estte pprecition between the two periods is negtive: the slope coefficient from Ordinry Lest Squres (OLS) estimtion is 0.5 nd is sttisticlly significnt t the 1% level, with R 2 = 0.28. Irelnd, South Afric, Spin, the United Kingdom, nd the US provide cler exmples of men revision before nd fter the globl crisis. There re few outliers in this reltionship, including mostly smll mrkets, i.e., Hong Kong, Chin; Irelnd; nd Romni (not included in the plot for illustrtive purposes). 2 To smooth sesonl fluctutions in qurterly rel estte vlution pprecition, current ccount deficit/gdp, nd domestic credit growth/gdp, we use their four-qurter moving verges (current plus three lgs) here nd in the following estimtion. 6
ADBI Working Pper 429 Aizenmn nd Jinjrk Figure 1: Men Reversion in Rel Estte Apprecition This figure plots cumultive rel estte vlution pprecition (rel estte infltion minus CPI infltion) for 2005:I 2007:III nd for 2008:III 2012:IV. The OLS estimtes re given by y = -0.5x+0.8 R 2 = 0.28. (s.e.) (0.1) (4.3) AT = Austri; AU = Austrli; BE = Belgium; BG = Bulgri; CA = Cnd; CH = Switzerlnd; CN = People s Republic of Chin; CZ = Czech Republic; DE = Germny; DK = Denmrk; ES = Spin; FI = Finlnd; FR = Frnce; GB = United Kingdom; GR = Greece; HK = Hong Kong, Chin; HU = Hungry; ID = Indonesi; IE = Irelnd; IT = Itly; JP = Jpn; KR = Republic of Kore; MY = Mlysi; NL = Netherlnds; NO = Norwy; NZ = New Zelnd; PL = Polnd; PT = Portugl; RO = Romni; SK = Slovki; SG = Singpore; SE = Sweden; TH = Thilnd; TW = Tipei,Chin; US = United Sttes; ZA = South Afric. Source: Authors clcultions. 7
ADBI Working Pper 429 Aizenmn nd Jinjrk Once we plot the country-specific evolution of rel estte vlution pprecition series, lrge differences pper cross countries in the ssocited ptterns ginst the bckdrop of the globl finncil crisis. Shown in Figure 2A, rel estte vlution vried mrkedly before nd fter the globl crisis events, s shown by the two verticl lines for 2007:III (Northern Rock event) nd for 2008:III (Lehmn Brothers event). While the rel estte vlution pprecition of some countries incresed until the crisis events (e.g., Cnd, Irelnd), for severl others the rel estte vlution pprecition vlution ws spirling downwrd even before the globl crisis (e.g., South Afric, the US). For some mrkets, the rel estte vlution pprecition ppered to bounce bck soon fter the globl finncil pnic (e.g., Austrli), while for few others, ntionl rel estte mrkets continued to be highly voltile (e.g., Hong Kong, Chin; nd Singpore). The ptterns of current ccount deficit/gdp nd domestic credit growth/gdp were lso heterogeneous cross countries over the periods before nd fter the globl finncil crisis. As shown in Figure 2A for current ccount deficit/gdp nd in Figure 2B for domestic credit growth/gdp, the qurterly djustment dynmics of these two vribles trcked the rel estte vlution pprecition in some countries quite well, wheres for severl others no reltionship ppered between the two vribles nd the rel estte vlution pprecition vlution. Hence, s n lterntive to using the globl crisis events (i.e., Northern Rock nd Lehmn Brothers) to mrk the turning points, we ssign new binry vrible current ccount deficit/gdp brek to identify country-specific brek dte, or structurl shift, in the empiricl ssocition between rel estte vlution pprecition nd current ccount deficit/gdp, ccording to Qundt likelihood rtio (QLR) sttistics; 3 nd new binry vrible domestic credit/gdp brek which is defined similrly for the stock of domestic credit/gdp. As shown in Figures 2A nd 2B, these empiricl turning points closely resemble the globl crisis events for mjority of countries (notbly Austrli, Spin, the UK, nd the US), wheres they were not the sme turning points in number of countries. 3 QLR test for brek t n unknown brek dte (Stock nd Wtson 2012). Here we re minly interested in empiricl breks of the ssocition between rel estte vlution pprecition nd current ccount deficit/gdp (or growth of domestic credit/gdp) in ech country over the smple period of 2005:I 2012:IV. For identifiction of extreme cpitl flow episodes from 1986 to 2009, see Forbes nd Wrnock (2012). 8
ADBI Working Pper 429 Aizenmn nd Jinjrk Figure 2A: Rel Estte Vlution Apprecition nd Current Account Deficit/Gross Domestic Product q = qurter. Note: Rel estte pprecition is drker line on the left scle. The two verticl lines denote 2007:III nd 2008:III, respectively. AT = Austri; AU = Austrli; BE = Belgium; BG = Bulgri; CA = Cnd; CH = Switzerlnd; CN = People s Republic of Chin; CZ = Czech Republic; DE = Germny; DK = Denmrk; ES = Spin; FI = Finlnd; FR = Frnce; GB = United Kingdom; GR = Greece; HK = Hong Kong, Chin; HU = Hungry; ID = Indonesi; IE = Irelnd; IT = Itly; JP = Jpn; KR = Republic of Kore; MY = Mlysi; NL = Netherlnds; NO = Norwy; NZ = New Zelnd; PL = Polnd; PT = Portugl; RO = Romni; SK = Slovki; SG = Singpore; SE = Sweden; TH = Thilnd; TW = Tipei,Chin; US = United Sttes; ZA = South Afric. Source: Authors clcultions. 9
ADBI Working Pper 429 Aizenmn nd Jinjrk Figure 2B: Rel Estte Vlution Apprecition nd Growth of Domestic Credit/GDP q = qurter. Note: Rel estte pprecition is drker line on the left scle. The two verticl lines denote 2007:III nd 2008:III, respectively. AT = Austri; AU = Austrli; BE = Belgium; BG = Bulgri; CA = Cnd; CH = Switzerlnd; CN = People s Republic of Chin; CZ = Czech Republic; DE = Germny; DK = Denmrk; ES = Spin; FI = Finlnd; FR = Frnce; GB = United Kingdom; GR = Greece; HK = Hong Kong, Chin; HU = Hungry; ID = Indonesi; IE = Irelnd; IT = Itly; JP = Jpn; KR = Republic of Kore; MY = Mlysi; NL = Netherlnds; NO = Norwy; NZ = New Zelnd; PL = Polnd; PT = Portugl; RO = Romni; SK = Slovki; SG = Singpore; SE = Sweden; TH = Thilnd; TW = Tipei,Chin; US = United Sttes; ZA = South Afric. Source: Authors clcultions. 10
ADBI Working Pper 429 Aizenmn nd Jinjrk 3. BASELINE RESULTS 3.1 Globl Finncil Crisis From our bseline estimtion, rel estte vlution is positively nd significntly ssocited with current ccount deficits in both periods before nd fter the crisis of 2008 2009. Rel estte vlution is positively ssocited with domestic credit growth to lesser degree, sttisticlly significnt only in the period before the crisis. Column 1 of Tble 1 provides the min results, using 2007:III (Northern Rock event) s the turning point tht mrked the globl finncil crisis, while column 2 uses 2008:III (Lehmn Brothers event) s n lterntive turning point. Both estimtion results re consistent with ech other, suggesting tht the ssocition of rel estte vlution pprecition with current ccount deficit/gdp nd with domestic credit growth/gdp re positive nd sttisticlly significnt (ccounting coefficient estimtes on the four lgs of current ccount deficit nd domestic credit growth). 4 4 The coefficients re obtined from the Arellno-Bond dynmic pnel estimtion. While only lgged rel estte vlution pprecition is treted s n endogenous regressor, the utocorreltion test suggests tht AR(2) is only mrginlly significnt t the 10% level, but not t the 5% level. 11
ADBI Working Pper 429 Aizenmn nd Jinjrk Tble 1: Globl Finncil Crisis nd Rel Estte Apprecition. This tble reports dynmic pnel estimtion, using qurterly dt over the period 2005:I 2012:IV. The dependent vrible is rel estte vlution pprecition (nominl price growth minus consumer price index [CPI] infltion). The globl finncil crisis brek is 1/0 binry vrible (dummy vrible), equl to 1 before 2007:III (Northern Rock event) for estimtion in the first column, wheres, lterntively, it is equl to 1 before 2008:III (Lehmn Brothers event) in the second column (see lso Figure 2A). The crisis breks enter the estimtion individully, s well s interction terms with the current ccount deficit/gdp (CAD/GDP) nd with domestic credit growth/gdp (DCR/GDP) series. Dep. Vr.: ΔRel Estte Apprecition (1) (2) Lg Brek (Crisis) 2007:III Brek (Crisis) 2008: III Regressors coefficient (std. err.) coefficient (std. err.) ΔRel estte vlution pprecition 1 0.63 (0.02) 0.63 (0.02) 2 0.64 (0.04) 0.62 (0.04) 3 0.20 (0.06) 0.19 (0.06) 4 0.00 (0.03) 0.00 (0.03) Globl finncil crisis brek binry (1/0) 2.35 (1.47) 1.68 (1.05) ΔCAD/GDP before brek 1 1.40 (0.90) 1.58 (0.79) b 2 1.53 (0.77) b 2.65 (0.68) ΔCAD/GDP fter brek 1 0.33 (0.65) 0.55 (0.66) 2 1.92 (0.65) 1.91 (0.66) ΔDCR/GDP before brek 1 1.37 (0.39) 0.88 (0.33) 2 0.35 (0.26) 0.32 (0.25) ΔDCR/GDP fter brek 1 0.19 (0.19) 0.16 (0.19) 2 0.17 (0.14) 0.16 (0.14) ΔCAD/GDP ΔDCR/GDP 1 0.02 (0.01) 0.01 (0.01) 2 0.00 (0.01) 0.00 (0.01) ΔEquity mrket vlution pprecition 1 0.21 (0.04) 0.21 (0.04) 2 0.16 (0.07) b 0.14 (0.07) c 3 0.07 (0.06) 0.07 (0.06) 4-0.00 (0.02) 0.00 (0.02) ΔCPI infltion 1-0.95 (0.50) c 1.18 (0.51) b ΔGrowth of industril production 1 0.09 (0.10) 0.07 (0.10) ΔTED spred 1 2.06 (1.75) 0.99 (1.71) ΔVIX 1 0.05 (0.09) 0.11 (0.10) ΔSovereign CDS 1 0.07 (0.22) 0.11 (0.22) Foreign reserve ccumultion 1 0.06 (0.06) 0.08 (0.06) constnt 0 0.77 (0.51) 0.05 (0.57) Observtions 791 791 Arellno-Bond AR(2) test p-vlue 0.084. CAD = current ccount deficit, CDS = credit defult swp, CPI = consumer price index, DCR = domestic credit, GDP = gross domestic product. Note: Stndrd errors re in prentheses. Sttisticl significnce t 1%. b Sttisticl significnce t 5%. c Sttisticl significnce t 10%. Source: Authors clcultions. 12
ADBI Working Pper 429 Aizenmn nd Jinjrk The bseline results lso show tht equity mrket pprecition nd infltion re empiriclly ssocited with rel estte vlution, while the reltionship with other vribles (growth, globl interest rte, sovereign risk, reserve ccumultion) is not supported in the current smple. The positive ssocition between rel estte vlution pprecition nd equity mrket vlution pprecition is consistent with the welth effects from rel estte vlution to equity investment, s cpitl gins in the equity investment spill over to the rel estte sector. The ssocition between rel estte vlution pprecition nd infltion is negtive, s one might expect. The coefficients of other vribles re not sttisticlly significnt; for some vribles, coefficient estimtes hve n unexpected sign (i.e., growth of industril production, TED spred, nd foreign reserve ccumultion). Interestingly, coefficient estimtes of lgged rel estte vlution pprecition indicte persistence in rel estte vlution up to two qurters, consistent with populr commentries tht rel estte mrkets re driven by niml spirits nd momentum, with the mcroeconomic nd regultory environment plying supporting role. The lgged rel estte coefficients re equl to 0.6 for the first two qurters nd sttisticlly significnt t the 1% level, suggesting tht more thn hlf of rel estte vlution ws crried on from one qurter to the next three qurters on verge. 5 However, our smple focuses on specific episode before nd fter the globl crisis. Hence, the findings do not imply tht expecttion-driven persistence in rel estte vlution my lst only hlf yer, but insted tht this observed momentum ppers to be the cse over the period of 2005:I 2012:IV. 3.2 Breks in Current Account Deficits nd Domestic Credit Growth The positive ssocition between rel estte pprecition nd current ccount deficit remins robust for lterntive turning points in their reltionship, but the ssocition between rel estte pprecition nd domestic credit growth does not. As shown in Figures 2A nd 2B, for mjority of countries, the globl crisis events (Northern Rock in 2007:III nd Lehmn Brothers in 2008:III) coincided with the empiricl turning points in the reltionship between rel estte vlution pprecition nd current ccount deficit/gdp, s well s the reltionship between rel estte vlution pprecition nd domestic credit growth/gdp. To verify, insted of using globl crisis binry vrible s done in Tble 1, we use in Tble 2 new binry vrible current ccount deficit/gdp brek tht identifies country-specific turning point in the ssocition between rel estte pprecition nd current ccount deficit/gdp, ccording to QLR sttistics s described in Section 2.2; growth of domestic credit/gdp brek is defined similrly for domestic credit growth/gdp; both re depicted in Figure 2. These country-specific breks enter the estimtion of Tble 2 individully, nd s interction terms with the current ccount deficit/gdp series nd with growth of domestic credit/gdp series. Tble 2, column 1 reports the dynmic pnel estimtes from these new specifictions. We find tht the positive ssocition between rel estte vlution pprecition nd current ccount deficit/gdp is still sttisticlly significnt, while the positive ssocition between rel estte vlution pprecition nd growth of domestic credit/gdp becomes insignificnt. 5 The coefficient estimte on third lg is negtive, but much smller thn the first two, so the net effect remins positive for three qurters. In Section 4, we revisit the economic significnce of lgged rel estte vlution in more detil. 13
ADBI Working Pper 429 Aizenmn nd Jinjrk Tble 2: Turning Points of Current Account Deficit/GDP nd Growth of Domestic Credit/GDP This tble reports dynmic pnel estimtion (first column) nd fixed-effect estimtion (second column), using qurterly dt over the period 2005:I 2012:IV. The dependent vrible is rel estte vlution pprecition (nominl price growth minus CPI infltion). Insted of using globl crisis binry vrible s in Tble 1, this tble uses new binry vrible current ccount deficit/gdp brek to identify country-specific turning points in the ssocition between rel estte pprecition nd CAD/GDP, ccording to Qundt Likelihood Rtio (QLR) sttistics. Growth of domestic credit/gdp brek is defined similrly for stock of domestic credit/gdp (see lso Figure 2). These country-specific breks enter the estimtion individully, nd s interction terms with the CAD/GDP nd DCR/GDP series. Dependent Vrible: ΔRel Estte (1) (2) Apprecition Lg Dynmic Pnel Estimtion Fixed-Effect Estimtion Regressors coefficient (std. err.) coefficient (std. err.) ΔRel estte vlution pprecition 1 0.64 (0.02) 0.63 (0.02) 2 0.62 (0.04) 0.65 (0.05) 3 0.17 (0.06) 0.19 (0.07) 4 0.01 (0.03) 0.01 (0.03) Current ccount deficit/gdp brek binry (1/0) 0.80 (1.18) 2.93 (1.53)* ΔCAD/GDP before brek 1 0.09 (0.73) 0.21 (0.69) 2 2.11 (0.69) 1.49 (0.64) b ΔCAD/GDP fter brek 1 0.38 (0.66) 0.23 (0.63) 2 1.99 (0.65) 1.56 (0.61) b Growth of domestic credit/gdp brek binry (1/0) 1.67 (1.22) 1.45 (1.45) ΔDCR/GDP before brek 1 0.36 (0.29) 0.20 (0.21) 2 0.01 (0.20) 0.00 (0.15) ΔDCR/GDP fter brek 1 0.19 (0.20) 0.04 (0.18) 2 0.18 (0.15) 0.15 (0.14) ΔCAD/GDP ΔDCR/GDP 1 0.01 (0.01) 0.01 (0.01) 2 0.00 (0.01) 0.00 (0.01) ΔEquity mrket vlution pprecition 1 0.21 (0.04) 0.15 (0.04) 2 0.15 (0.07) b 0.09 (0.07) 3 0.07 (0.06) 0.02 (0.06) 4 0.00 (0.02) 0.01 (0.02) ΔCPI infltion 1 1.23 b (0.50) 0.40 (0.46) ΔGrowth of industril production 1 0.07 (0.10) 0.08 (0.09) ΔTED spred 1 0.66 (1.70) 0.41 (1.68) ΔVIX 1 0.01 (0.08) 0.01 (0.08) ΔSovereign CDS 1 0.10 (0.23) 0.05 (0.27) Foreign reserve ccumultion 1 0.04 (0.06) 0.04 (0.06) constnt 0 0.32 (0.66) 1.40 (0.73) c Observtions 791 791 Arellno-Bond AR(2) test p-vlue. R 2 = 0.81 CAD = current ccount deficit, CDS = credit defult swp, CPI = consumer price index, DCR = domestic credit, GDP = gross domestic product. Note: Stndrd errors re in prentheses. Sttisticl significnce t 1%. b Sttisticl significnce t 5%. c Sttisticl significnce t 10%. Source: Authors clcultions. 14
ADBI Working Pper 429 Aizenmn nd Jinjrk In ddition, with these lterntive turning points, using the fixed-effect estimtion does not chnge the min finding on the positive nd sttisticlly significnt ssocition between rel estte vlution nd current ccount deficit. As shown in column 2 of Tble 2, the coefficient estimtes of current ccount deficit/gdp remin sttisticlly significnt in the fixed-effect estimtion; the coefficient estimtes of lgged rel estte vlution pprecition nd equity mrket vlution pprecition lso remin sttisticlly significnt. Further, current ccount deficit/gdp enters the estimtion positive nd sttisticlly significnt both individully nd s interction terms. The explntory power, s mesured by R 2 in column 2, suggests tht the estimtion is ble to explin bout 80% of vrition in the rel estte vlution over the period of 2005:I 2012:IV. Since drwbck of fixed-effect estimtion is lck of empiricl tretment on endogeneity in the presence of lgged dependent vrible (rel estte vlution pprecition), we tke the fixed-effect estimtes s supportive evidence nd continue onwrd with the dynmic pnel estimtion in the following. 6 3.3 Current Account Deficit vis-à-vis Domestic Credit Growth Horsercing current ccount deficit vis-à-vis growth of domestic credit suggests tht the former is more sttisticlly significnt in the empiricl ssocition with rel estte vlution. The findings in Tbles 1 nd 2 show tht the positive ssocition between rel estte vlution pprecition nd current ccount deficit/gdp is lwys sttisticlly significnt, wheres the ssocition between rel estte vlution pprecition nd growth of domestic credit/gdp is insignificnt in severl specifictions (i.e., Tble 2, columns 1 nd 2). This difference might be due to common underlying fctors in both current ccount nd credit growth series; the ptterns illustrted in Figures 2A nd 2B seem to suggest tht both series trcked rel estte vlution pprecition quite well for mjority of countries, before nd fter the globl crisis. Alterntively, the difference might be due to insufficient lgged djustment llowed for these two vribles in the estimtion. Accordingly, in Tble 3 we llow for four lgs of current ccount deficit/gdp in column 1, excluding growth of domestic credit/gdp nd binry vrible for the globl crisis or binry vrible for turning points in the ssocition between rel estte vlution pprecition nd current ccount deficit/gdp. Similrly, we llow for four lgs of growth of domestic credit/gdp in column 2, excluding current ccount deficit/gdp nd binry vrible for the globl crisis or for the turning points in growth of domestic credit/gdp. Bsed on these lterntive specifictions, the findings re consistent with the coefficient estimtes of Tbles 1 nd 2. Without growth of domestic credit/gdp in the estimtion, the ssocition between rel estte vlution pprecition nd current ccount deficit/gdp remins positive nd significnt (column 1). On the other hnd, without current ccount deficit/gdp in the estimtion, the ssocition between rel estte vlution pprecition nd growth of domestic credit/gdp is still wek nd insignificnt t ll lgs (column 2). 6 For the rel estte vlution nd current ccount reltionship, it is not n objective of this pper nd nevertheless beyond the scope of the study to defend either method of the pnel estimtion. Hypotheticlly, in the context of reduced form nlysis, endogenous regressors my include not only lgged rel estte vlution pprecition, but lso dditionl lgs of the right-hnd-side vribles, i.e., current ccount deficit/gdp, growth of domestic credit/gdp, nd equity mrket vlution pprecition. Alterntively, one my consider the current ccount s endogenous nd study the present vlue of the current ccount with rel estte vlution (nd for tht mtter, other sset prices) nd vector utoregressions (lthough the cusl ordering hs never been cler in such setting for ll contemporneous coordintes). Essentilly, in the generl equilibrium nlysis, ll the vribles would be endogenous, even the incidence of globl crises. Hence, since we tke no stnce nd there is no point in being too defensive bout the min specifictions reported in this pper, we provide bttery of results bsed on vrious specifictions for the reders to judge. 15
ADBI Working Pper 429 Aizenmn nd Jinjrk Tble 3: Current Account Deficit vis-à-vis Growth of Domestic Credit on Rel Estte Vlution This tble reports dynmic pnel estimtion, using qurterly dt over the period 2005:I 2012:IV. The dependent vrible is rel estte vlution pprecition (nominl price growth minus CPI infltion). Dependent Vrible: ΔRel Estte Apprecition Lg (1) (2) Regressors coefficient (std. err.) coefficient (std. err.) ΔRel estte vlution pprecition 1 0.64 (0.02) 0.64 2 0.63 (0.04) 0.61 3 0.18 (0.06) 0.15 ΔCurrent ccount deficit/gdp 1 0.56 (0.75) (0.02) (0.04) (0.06) b 4 0.01 (0.03) 0.02 (0.03) 2 5.33 (1.64) 3 3.02 (1.67) c 4 0.56 (0.61) ΔGrowth of domestic credit/gdp 1 0.15 (0.23) 2 0.23 (0.45) 3 0.18 (0.40) 4 0.08 (0.14) ΔEquity mrket vlution pprecition 1 0.20 (0.04) 0.23 (0.04) 2 0.13 (0.07) c 0.17 (0.07) b 3 0.06 (0.06) 0.08 (0.06) 4 0.00 (0.02) 0.01 (0.02) ΔCPI infltion 1 1.25 (0.49) b 1.20 (0.50) b ΔGrowth of industril production 1 0.04 (0.10) 0.08 (0.10) ΔTED spred 1 0.58 (1.70) 1.42 (1.68) ΔVIX 1 0.02 (0.08) 0.02 (0.08) ΔSovereign CDS 1 0.06 (0.22) 0.08 (0.22) Foreign reserve ccumultion 1 0.06 (0.06) 0.06 (0.06) b constnt 0 1.05 (0.44) 0.93 Observtions 765 765 (0.44) b Arellno-Bond AR(2) test p-vlue.. CAD = current ccount deficit, CDS = credit defult swp, CPI = consumer price index, DCR = domestic credit, GDP = gross domestic product. Note: Stndrd errors re in prentheses. Sttisticl significnce t 1%. b Sttisticl significnce t 5%. c Sttisticl significnce t 10%. Source: Authors clcultions. 16
ADBI Working Pper 429 Aizenmn nd Jinjrk Bsed on sttisticl pir-wise correltion nd pnel co-integrtion tests, multicollinerity between current ccount deficit nd growth of domestic credit is unlikely, t lest for the 2005:I 2012:IV smple. As discussed erlier vi Appendix C, the pnel co-integrtion tests cnnot reject the null of no co-integrtion between current ccount deficit/gdp nd growth of domestic credit/gdp. We lso find tht the pir-wise correltion between the two series is only 0.1 cross countries in our smple. Nevertheless, this does not imply tht we should rule out ltogether potentil feedbck between current ccount deficit nd growth of domestic credit in other smples, presumbly with longer smple nd covering episodes other thn those we currently exmine. Useful extension my lso try to understnd cuslity between current ccount nd credit growth cross time nd countries. One my suspect some intertwining of household debt ccumultion, consumption of durbles, nd domestic indebtedness in foreign currency becoming importnt fctors in such setting. 4. SENSITIVITY ANALYSIS 4.1 Reverse Feedbck We find tht reverse nd positive feedbck of rel estte pprecition to current ccount deficit is not supported by the dt over the crisis period. To investigte for possible feedbck from rel estte vlution pprecition, Tble 4 column 1 reverses the empiricl specifiction of column 1 in Tble 1 by plcing current ccount deficits/gdp on the left-hnd side of the estimting eqution. This specifiction is not strightjcket model of current ccount, but is simple verifiction of possible influence on current ccount from rel estte vlution. The coefficient estimtes suggest tht there is no evidence of positive feedbck of rel estte vlution pprecition to current ccount deficit/gdp in the dt. As shown in Tble 4, the coefficient estimtes of rel estte vlution pprecition, while sttisticlly significnt, hve negtive sign, opposite to wht one might expect, before nd fter the globl crisis period. This counterintuitive finding seems to be rther consistent with the pnel co-integrtion tests in Appendix C where we cnnot reject the null of no co-integrtion between current ccount deficit/gdp nd rel estte vlution pprecition. However, these non-findings do not rule out positive nd reverse feedbck of rel estte pprecition to current ccount deficits in other smples, but only tht ny support for such reverse feedbck is not prevlent during the 2005:I 2012:IV period tht we study. On the other hnd, nd contrry to pnel co-integrtion tests, the coefficient estimtes of dynmic pnel estimtion suggest positive feedbck of rel estte pprecition to equity mrket pprecition, finding consistent with the welth effects from rel estte vlution to equity investment. In column 2 of Tble 4, we replce left-hnd-side vrible of the estimting eqution with equity mrket vlution pprecition. As shown in the column, positive ssocition between equity mrket vlution pprecition nd rel estte vlution pprecition is sttisticlly significnt before nd fter the globl crisis period. However, we suspect tht common underlying cuses of these two vribles my not be the sme. In the present context, the ssocition between equity mrket vlution pprecition nd current ccount deficit/gdp is negtive before the globl finncil crisis (Tble 4 column 2), wheres the ssocition is positive between rel estte vlution pprecition nd current ccount deficit/gdp (erlier in Tble 1 column 1). Interestingly, the reltionship between equity mrket vlution pprecition nd growth of industril production, TED spred, sovereign credit defult swp (CDS), nd foreign reserve ccumultion in Tble 4 re lso sttisticlly significnt with expected signs, in contrst to the eqution of rel estte vlution in Tble 1. This finding my lso imply tht the 17
ADBI Working Pper 429 Aizenmn nd Jinjrk momentum nd niml-spirits chnnels in the rel estte vlution cn chnge rther independently from those in equity investment over the crisis period. 7 Tble 4: Reverse Feedbck of Rel Estte Apprecition to Current Account nd Equity Mrket This tble reports dynmic pnel estimtion, using qurterly dt over the period 2005:I 2012:IV. The dependent vrible is current ccount deficit/gdp in the first column nd equity mrket pprecition in the second column. The globl finncil crisis brek is 1/0 binry vrible, equl to 1 before 2007:III (Northern Rock event) (see lso Figure 2). The crisis brek enters the estimtion individully, nd s interction terms with rel estte pprecition/cpi series. Lg (1) (2) ΔCAD/GDP ΔEquity Apprecition Regressors coefficient (std. err.) coefficient (std. err.) ΔCAD/GDP 1 0.40 (0.04) 3.87 (1.42) 2 0.61 (0.08) 0.87 (3.28) 3 0.91 (0.08) 1.48 4 0.33 (0.03) 0.34 (3.38) (1.24) Globl finncil crisis brek binry (1/0) 0.17 (0.10) c 4.87 (2.19) b ΔRel estte pprecition before brek 1 0.01 (0.02) 1.46 (0.67) b 2 0.05 (0.02) b 0.07 (0.73) ΔRel estte pprecition fter brek 1 0.04 (0.01) 1.02 (0.42) b 2 0.01 (0.02) 0.01 (0.58) ΔEquity mrket vlution pprecition 1 0.00 (0.00) 0.56 (0.07) 2 0.00 (0.00) 1.43 (0.13) 3 0.00 (0.00) 1.24 (0.11) 4 0.00 (0.00) 0.41 (0.03) ΔCPI infltion 1 0.06 (0.03) b 6.19 (0.95) ΔGrowth of industril production 1 0.01 (0.01) c 0.56 (0.19) ΔTED spred 1 0.20 (0.11) c 12.64 (3.15) ΔVIX 1 0.01 (0.01) 0.01 (0.16) ΔSovereign CDS 1 0.02 (0.01) 0.72 (0.43) c Foreign reserve ccumultion 1 0.01 (0.00) b 0.22 (0.12) c constnt 0 0.07 (0.03) b 2.30 (0.96) b Observtions 789 791 Arellno-Bond AR(2) test p-vlue 0.921 0.600 CAD = current ccount deficit, CDS = credit defult swp, CPI = consumer price index, DCR = domestic credit, GDP = gross domestic product. Note: Stndrd errors re in prentheses. Sttisticl significnce t 1%. b Sttisticl significnce t 5%. c Sttisticl significnce t 10%. Source: Authors clcultions. 7 Crroll, Otsuk, nd Slclek (2011) find tht n eventul mrginl propensity to consume from $1 chnge in housing welth is bout $0.09 substntilly lrger thn the effect of shocks to finncil welth. Hence, our emphsis plced on the rel estte vlution hs dditionl merit t mcro level. 18
ADBI Working Pper 429 Aizenmn nd Jinjrk 4.2 Asymmetric Adjustment Additionl sensitivity checks show tht for the pprecition episode of the rel estte vlution, positive ssocition between rel estte pprecition nd current ccount deficit is sttisticlly significnt, while the positive ssocition between rel estte pprecition nd growth of domestic credit is sttisticlly significnt but to lesser degree. In Tble 5, we llow for symmetric djustment, ssigning different coefficients for the estimtion of rel estte vlution pprecition (column 1) nd the estimtion of rel estte vlution deprecition (column 2); the specifiction closely resembles tht in Tble 1, but here we seprte the whole smple into rel estte pprecition smple nd rel estte deprecition smple. For the rel estte pprecition episode, estimtion results re lrgely consistent with the results from the whole-smple estimtion in column 1 of Tble 1; n exception is tht coefficient estimtes of equity mrket vlution pprecition nd infltion re insignificnt. For the rel estte deprecition episode, the estimtion results re mrkedly different from the whole-smple estimtion, s only lgged rel estte vlution pprecition nd equity mrket vlution pprecition re found sttisticlly significnt in the ssocition with the rel estte vlution. Hence, we find tht when rel estte mrkets were on the rise, the rel estte vlution djusts with respect to mcro vribles differently from when the mrkets were declining. Asymmetric bubble dynmics re evident in the rel estte vlution. 19
ADBI Working Pper 429 Aizenmn nd Jinjrk Tble 5: Apprecition vis-à-vis Deprecition Episodes of Rel Estte Vlution This tble reports dynmic pnel estimtion on the episode of rel estte mrket pprecition in the first column nd on the episode of rel estte mrket deprecition in the second column, using qurterly dt over the period 2005:I 2012:IV. The dependent vrible is rel estte vlution pprecition (nominl price growth minus CPI infltion). Insted of using globl crisis binry vrible, s in Tble 2, this tble uses binry vrible current ccount deficit/gdps brek to identify country-specific turning points in the ssocition between rel estte pprecition nd current ccount deficit/gdp, ccording to QLR sttistics. Domestic credit/gdp brek is defined similrly for growth of domestic credit/gdp (see lso Figure 2). The country-specific breks enter the estimtion individully, nd s interction terms with the CAD/GDP nd DCR/GDP series. Constnt term is included, but not reported. Dependent Vrible: ΔRel Estte (1) (2) Apprecition Lg Apprecition Episodes Deprecition Episodes Regressors coefficient (std. err.) coefficient (std. err.) ΔRel estte vlution pprecition 1 0.60 (0.03) 0.65 (0.03) 2 0.87 (0.07) 0.54 (0.05) 3 0.29 (0.10) 0.20 (0.07) 4 0.03 (0.05) 0.00 (0.04) Current ccount deficit/gdp brek binry (1/0) 2.26 (1.46) 0.68 (1.33) ΔCAD/GDP before brek 1 0.86 (0.88) 0.35 (0.85) 2 2.83 (0.90) 0.32 (0.79) ΔCAD/GDP fter brek 1 0.75 (0.81) 0.79 (0.76) 2 2.70 (0.81) 0.25 (0.77) Growth of domestic credit/gdp brek binry (1/0) 1.23 (1.44) 1.25 (1.31) ΔDCR/GDP before brek 1 0.13 (0.40) 0.15 (0.24) 2 0.27 (0.26) 0.08 (0.17) ΔDCR/GDP fter brek 1 0.08 (0.27) 0.36 (0.22) 2 0.54 b (0.21) 0.14 (0.16) ΔCAD/GDP ΔDCR/GDP 1 0.01 (0.01) 0.00 (0.01) 2 0.01 (0.01) 0.01 (0.01) ΔEquity mrket vlution pprecition 1 0.08 (0.06) 0.24 (0.04) 2 0.00 (0.10) 0.21 (0.07) 3 0.03 (0.08) 0.09 (0.06) 4 0.02 (0.03) 0.01 (0.02) ΔCPI infltion 1 0.11 (0.74) 1.13 (0.47) b ΔGrowth of industril production 1 0.17 (0.14) 0.08 (0.10) ΔTED spred 1 2.89 (2.80) 0.89 (1.80) ΔVIX 1 0.04 (0.14) 0.03 (0.09) ΔSovereign CDS 1 1.62 (1.98) 0.14 (0.22) Foreign reserve ccumultion 1 0.01 (0.07) 0.04 (0.08) Observtions 367 424 Arellno-Bond AR(2) test p-vlue 0.495. CAD = current ccount deficit, CDS = credit defult swp, CPI = consumer price index, DCR = domestic credit, GDP = gross domestic product. Note: Stndrd errors re in prentheses. Sttisticl significnce t 1%. b Sttisticl significnce t 5%. Source: Authors clcultions. 20
ADBI Working Pper 429 Aizenmn nd Jinjrk 4.3 Economic Significnce Bsed on smple stndrd devition nd estimtion results, the economic significnce on rel estte vlution is driven mostly by lgged rel estte pprecition, followed by current ccount deficit, growth of domestic credit, nd equity mrket pprecition. We rech this conclusion by ccounting for ll our min findings nd sensitivity checks, including in prticulr positive feedbck of rel estte pprecition to equity mrket pprecition (Tble 4) nd symmetric djustment in rel estte pprecition nd in deprecition episodes (Tble 5). Essentilly, we revise the empiricl specifiction of column 1 in Tble 1, hereby verifying our estimtion in Tble 6 by treting rel estte pprecition nd equity mrket pprecition both s endogenous regressors. Our benchmrk findings re reported in Tble 6, for the whole smple in column 1, nd for the episode of rel estte pprecition in column 2. Next, we clculte the economic significnce on rel estte vlution of ech mcro vrible by multiplying one stndrd devition of ech vrible with its coefficient estimte of column 1 in Tble 6. As shown in Figure 3 for the rel estte vlution on n nnulized bsis, the most economiclly significnt vrible is lgged rel estte vlution pprecition (10.4%), then current ccount deficit/gdp (5.0%), growth of domestic credit/gdp (3.0%), nd equity mrket vlution pprecition (1.5%), for our smple of 36 countries during 2005 2012. 21
ADBI Working Pper 429 Aizenmn nd Jinjrk Tble 6: Benchmrk Results This tble reports dynmic pnel estimtion, using qurterly dt over the period 2005:I 2012:IV. The dependent vrible is rel estte vlution pprecition (nominl price growth minus CPI infltion). The empiricl specifiction is similr to tht of Tble 1 column (1), but in this tble both lgged rel estte pprecition nd lgged equity mrket pprecition re endogenous regressors. The globl finncil crisis brek is 1/0 binry vrible, equl to 1 before 2007:III (Northern Rock event) for estimtion (see lso Figure 2A). The crisis breks enter the estimtion individully, s well s interction terms with the CAD/GDP nd DCR/GDP series. Dependent Vrible: ΔRel estte (1) (2) pprecition Lg Whole Smple Apprecition Episodes Regressors coefficient (std. err.) coefficient (std. err.) ΔRel estte vlution pprecition 1 0.63 (0.02) 0.60 (0.03) 2 0.65 (0.04) 0.88 (0.07) 3 0.20 (0.06) 0.31 (0.10) 4 0.00 (0.03) 0.03 (0.05) Globl finncil crisis brek binry (1/0) 1.82 (1.06) c 1.93 (1.32) ΔCAD/GDP before brek 1 0.79 (0.68) 0.02 (0.83) 2 1.50 (0.61) b 1.98 (0.82) b ΔCAD/GDP fter brek 1 0.35 (0.55) 0.59 (0.75) 2 1.67 (0.55) 2.29 (0.78) ΔDCR/GDP before brek 1 0.81 (0.27) 0.36 (0.36) 2 0.19 (0.19) 0.22 (0.25) ΔDCR/GDP fter brek 1 0.12 (0.15) 0.04 (0.25) 2 0.11 (0.11) 0.42 (0.20) b ΔCAD/GDP ΔDCR/GDP 1 0.01 (0.01) 0.01 (0.01) 2 0.00 (0.01) 0.00 (0.01) ΔEquity mrket vlution pprecition 1 0.15 (0.03) 0.07 (0.05) 2 0.10 (0.06) 0.01 (0.10) 3 0.03 (0.05) 0.03 (0.08) 4 0.01 (0.02) 0.02 (0.03) ΔCPI infltion 1 0.53 (0.42) 0.24 (0.71) ΔGrowth of industril production 1 0.06 (0.08) 0.15 (0.13) ΔTED spred 1 1.52 (1.56) 0.96 (2.81) ΔVIX 1 0.04 (0.08) 0.08 (0.14) ΔSovereign CDS 1 0.10 (0.21) 1.16 (1.91) Foreign reserve ccumultion 1 0.05 (0.05) 0.02 (0.07) constnt 0 0.95 b (0.47) 1.18 (0.77) Observtions 791 367 Arellno-Bond AR(2) test p-vlue 0.495 0.468 CAD = current ccount deficit, CDS = credit defult swp, CPI = consumer price index, DCR = domestic credit, GDP = gross domestic product. Note: Stndrd errors re in prentheses. Sttisticl significnce t 1%. b Sttisticl significnce t 5%. c Sttisticl significnce t 10%. Source: Authors clcultions. 22