Household Debt, Housing Prices and the Monetary Transmission Mechanism in Canada: A Provincial Analysis

Abstract

Following the recent financial crisis in 2008 the topics of household debt and house prices have been brought to the forefront of economic research. Several papers have been directed towards identifying the implications of these variables as they pertain to the vulnerability of the macroeconomy. However, the available literature, as it pertains to the Canadian economy, is limited. This paper utilizes a Global Vector Autoregressive (GVAR) framework to investigate the monetary transmission mechanism in Canada, and in nine individual provinces. The conclusions drawn from the paper indicate that there exist asymmetries in the transmission of monetary policy across provinces. Furthermore, the level of household debt held by a province is found to be proportional to the magnitude of the responses following a monetary policy shock. This result identifies consequences of increasing levels of household debt and over-priced real estate as they pertain to the overall stability of the macroeconomy.