Unconventional monetary policy and real estate sector: a financial dynamic computable general equilibrium model for Italy

Abstract

This study investigates the effects of an expansionary monetary policy on the Italian economy and, in particular, on real estate (RE) as a commodity. RE is a key sector for the Italian economy. It has strong interactions with the other sectors, especially with the financial markets. Therefore, we develop a financial dynamic computable general equilibrium model to analyze the response of RE sector to a shock on money supply. The parameters of the model are calibrated on the financial social accounting matrix for Italy that identifies the economic and financial flows in the economic system in a well-defined time period. Our findings confirm that the policy has a positive impact on real economy and on the RE output, value added and pricing.

KEYWORDS:

• Monetary policy
• real estate sector
• financial SAM
• dynamic CGE analysis

JEL CLASSIFICATIONS:

• E51
• E52
• G21

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Irfan Ahmed http://orcid.org/0000-0002-9015-0277

Claudio Socci http://orcid.org/0000-0002-8367-0776

Francesca Severini http://orcid.org/0000-0003-4969-0834

Rosita Pretaroli http://orcid.org/0000-0002-1676-0114

Notes

1 The power of dispersion and the sensitivity of dispersion respond to Rasmussen’s (1956) definition.

2 Available at https://www.istat.it/en/archivio/216278.

3 The program for the purchase of financial assets, considered among the unconventional policies of the ECB, began with an intervention of €60 billion for the first year on a monthly basis from March 2015 to March 2016. The largest share was used for the Public Sector Purchase Program (PSPP). The share of public securities that can be purchased was subsequently extended, including those issued by local authorities. Starting from April 2016, the purchase program has undergone further acceleration to reach peaks of around 80 billion Euros a month. In addition, in this case, there has been a further expansion of the basket of securities that can be purchased, including among private securities the securities issued by private nonfinancial companies (banks) with a rating not higher than BBB. At the end of 2017, the asset purchase program (APP) returned to the initial level, followed by a ‘soft landing’.

4 I. Compensation of employees, II. Mixed Income, III. Gross Operating Surplus and IV. Other taxes net of subsidies to domestic production.

5 See for reference: https://ec.europa.eu/eurostat/documents/3859598/5902521/KS-RA-07-015-EN.PDF.

6 The value of g is set equal to 0.6% because it is the average real growth rate of GDP in the latest five years, from 2010 to 2018 (ISTAT, 2019). We choose this span of time because it represents the average growth of the Italian economy in the latest ten years. The nominal Interest rate is set equal to 4% because it corresponds to the average nominal interest rate on loans charged by banks to households and non-financial corporations from 2010 to 2018, disseminated by the Bank of Italy (2019).

7 Tax rates are calibrated on the SAM flows and assumed as constant over the time.

8 This assumption can be revised when considering periods of severe downturns in which the level of investment is determined mainly by profit expectations rather than by savings availability. This can be done by changing the rule underlying the formation of capital and thus the value added formation. But the balance between savings and investments represents a quite standard closure condition for dynamic CGE modeling (Taylor, 1990).

9 For instance, the elasticity of substitution between domestic goods and imports is set equal 0.3, between labour and capital is 0.52 and in the consumption function is 1.0.

10 According to the Equation 21, we consider a shock on the asset related to the Financial instrument n.12 and n.4 owed by the Rest of the world and Government: $A{o}_{Row}^{12}$ and $A{o}_{Gov}^4$.