Essays on credit frictions and the macroeconomy

The three chapters in this thesis consider the role macroprudential policy can play in economic booms and busts. The first two chapters concern the recent housing boom in the United States. Whilst it is popularly thought that a significant easing of credit standards caused the boom, the econometric attempts to establish this are largely inconclusive. The fall in real interest rates also fail to account for the magnitude of the boom, suggesting buyers' irrational exuberance. I approach this problem in a new way using tiered housing data that separately covers the price movements of cheap and expensive houses. During the US boom, the cheapest houses had the largest relative price gains in 51 of 52 metro areas studied. In the first chapter I use a simple model to show that this pattern could not have occurred without an easing of credit standards: without this, buyer exuberance or a fall in interest rates would produce the opposite pattern. Chapter two examines alternative explanations for the tiered pattern, including changes in housing supply, speculation and differential income growth. I show that these variables are not responsible for the pattern, but that, in keeping the theory, there is a statistically and economically significant relationship between credit easing and the relative performance of low and high tier house prices. Taken together, the two chapters conclude that the housing boom would have significantly smaller if policy had prevented credit standards from easing. The third chapter considers credit traps; a situation in which a severe financial crisis gives rise to a prolonged period of low lending to, and stagnation of, the real economy. We introduce a model in which credit traps are possible, then consider what macroprudential policy can do to help the economy escape from a trap, and to reduce the chances of falling into one

Home values and firm behaviour

The homes of those in charge of firms are an important source of finance for ongoing businesses. We use firm level accounting data, transaction level house price data and loan level residential mortgage data from the UK to show that a £1 increase in the value of the residential real estate of a firm’s directors increases the firm’s investment and wage bill by £0.03 each. These effects run through smaller firms and are similar in booms and busts. In aggregate, the homes of firm directors are worth 80% of GDP. Using this, a back of the envelope calculation suggests that a 1% increase in real estate prices leads, through this channel, to up to a 0.28% rise in business investment and a 0.08% rise in total wages paid. We complement this with evidence on how a firm responds to changes in the value of its own corporate real estate; we find that, in aggregate, the residential real estate of directors is at least as important for activity. We use an estimated general equilibrium model to quantify the importance of both types of real estate for the propagation of shocks to the macroeconomy

The residential collateral channel

We present evidence on a new macroeconomic channel which we call the residential collateral channel. Through this channel, an increase in real estate prices expands firm activity by enabling company directors to utilise their residential property as a source of funds for their business. This channel is a key determinant of investment and job creation, with a £1 increase in the combined residential collateral of a firm’s directors estimated to increase the firm’s investment by £0.02 and total wage costs by £0.02. To show this, we use a unique combination of UK datasets including firm-level accounting data matched with transaction-level house price data and loan-level residential mortgage data. The aggregate value of residential collateral held by company directors (around 70% of GDP) suggests that this channel has important macroeconomic effects. We complement this with further evidence on the corporate collateral channel whereby an increase in real estate prices directly expands firm activity by enabling businesses to borrow more against their corporate real estate. An estimated general equilibrium model with collateral constrained firms is used to quantify the aggregate effects of both channels

Employment and the collateral channel of monetary policy

This paper uses a detailed firm-level dataset to show that monetary policy propagates via asset prices through corporate debt collateralised on real estate. Our research design exploits the fact that many small and medium sized firms use the homes of the firm’s directors as a key source of collateral, and directors’ homes are typically not in the same region as their firm. This spatial separation of firms and firms’ collateral allows us to separate the propagation of monetary policy via fluctuations in collateral values from that via demand channels. We find that younger and more levered firms who have collateral values that are particularly sensitive to monetary policy show the largest employment response to monetary policy. The collateral channel explains a sizeable share of the aggregate employment response

Lending relationships and the collateral channel

This paper shows that lending relationships insulate corporate investment from shocks to collateral values. We construct a novel database covering the banking relationships of UK firms, as well as those of their board members and executives. We find that the sensitivity of corporate investment to shocks to real estate collateral value is halved when the length of the bank-firm relationship increases from the 25th to the 75th percentile. This effect is substantially reduced for firms whose executives have a personal mortgage relationship with their firm’s bank. Our findings provide support for theories where collateral and private information are substitutes in mitigating credit frictions over the cycle

Employment and the Residential Collateral Channel of Monetary Policy

Using micro-data covering private and public UK firms, we document heterogeneous responses to monetary policy; finding that employment at younger, more-levered firms is most sensitive. This heterogeneity is consistent with firm-level financial constraints. To show this, we exploit the fact that the homes of company directors are a key source of corporate collateral, but many directors live in a different region to their firm, allowing specifications controlling for demand. Younger, more-levered firms exposed to collateral fluctuations drive the employment response, showing a residential collateral channel in the transmission of monetary policy to firms. JEL Codes: D22, E52, R3

The majority of patients with long-duration type 1 diabetes are insulin microsecretors and have functioning beta cells.

Classically, type 1 diabetes is thought to proceed to absolute insulin deficiency. Recently developed ultrasensitive assays capable of detecting C-peptide under 5 pmol/l now allow very low levels of C-peptide to be detected in patients with long-standing type 1 diabetes. It is not known whether this low-level endogenous insulin secretion responds to physiological stimuli. We aimed to assess how commonly low-level detectable C-peptide occurs in long-duration type 1 diabetes and whether it responds to a meal stimulus.This article is freely available via Open Access. Click on the 'Additional Link' above to access the full-text via the publisher's site