Chan, T S-F (1996) Residential construction, liquidity constraints, and monetary policy transmission. PhD thesis, Washington University in St. Louis, USA.
Abstract
In recent years, the effects of capital market imperfections for monetary policy transmission have received much attention in empirical macroeconomics. This dissertation examines such a channel for monetary policy transmission through residential construction. There are reasons to believe that the construction industry is among the most likely sectors to be affected by asymmetric information problems in the credit market. Builders are usually small firms with limited reputation. In addition, aggregate construction is likely to manifest the liquidity constraints of some builders since the "lemons" problem in land transactions makes it costly for unconstrained builders to substitute for liquidity-constrained builders. A reduced-form empirical equation is derived from the implications of the Euler equation of a liquidity-constrained builder. The equation is estimated with two-stage least square and GMM. In addition to the interest rate, several credit-related variables all appear highly significant, including a dummy capturing the impact of a series of new financial regulations implemented since 1989 and the median time to sell for new house. The latter variable is expected to affect borrowing because a longer time to sell increases the uncertainty of new construction and uncertainty aggravates the moral hazard problem of lending. On the other hand, many indicators of the stance of monetary policy, including the Romer dates and the Fed Fund rates, all appear insignificant. These results suggest the following: First, financial markets propagate their impulses to residential construction through many channels in addition to the conventional interest rate channel. Second, unless the monetary policy indicators are inaccurate, monetary policy shocks should not have caused significant financial impulses to residential construction which are independent from the interest rate. Third, the series of new financial regulations proposed and implemented since 1989 have reduced construction loan supply. Fourth, housing selling time affects construction loan supply by affecting the uncertainty involved in lending. I also expect that speculative construction has more severe information problems because of a greater uncertainty. To test this hypothesis, a speculative housing starts series is derived from data available from the Census Bureau. Estimation results with this series support this hypothesis and are consistent with the results for the total construction series summarized above. This evidence further suggests that monetary policy shocks independent of the real interest rates are not important in residential construction.
| Item Type: | Thesis (Doctoral) |
|---|---|
| Thesis advisor: | Fazzari, S M |
| Uncontrolled Keywords: | builder; interest rate; liquidity; macroeconomics; market; markets; moral hazard; policy; residential; uncertainty |
| Index terms: | residential construction, construction industry, dissertation, markets, macroeconomics, liquidity, land transaction, aggregate, estimation, interest rate, regulation, evidence, housing, moral hazard, builder |
| Subjects: | financial risk, economic analysis, practitioner, materials science, research dissemination and communication, evaluation and assessment methods, construction type, economic theory, political science, industry analysis, construction integration, economics, financial and cost management |
| Topics: | Business Strategy, Cost Management, Research Practice, Roles and Professions, Governance, Construction Technology, Urban Studies, Engineering Principles |
| Descriptive scope: | 4 PCTA |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here