Asset markets
Households own all assets in the model including the firms. Households earn labour income and dividend income as firm owners. The two most important assets of the households are real estate (family houses) and equity. Household nominal wealth is given by
where SEHW is housing wealth and financial net wealth is defined by
where SEDEBTP is the nominal government debt, SERX the dollar exchange rate, SENA net foreign assets, SEMISC is miscellaneous financial assets which mainly consists of equity and SELIABS is liabilities, all in nominal terms.
There are similar equations to determine these asset prices. Equity prices are determined by , i.e. by nominal GDP and the nominal short run interest rate. Equity prices then affect the value of SEMISC, which is determined by
and moves in line with nominal GDP in the long run.
The government debt is affected by the long run interest rate SELR such that an increase in the interest rate increases the debt. An increase in the interest rate will also increase the value of foreign assets SENA, which is measured in dollars. An increase in the interest rate will appreciate the SEK. For positive net foreign assets this will decrease wealth while for negative positions wealth will increase. Finally, household liabilities are assumed to change in proportion to household net income, i.e.
Finally there is housing wealth which changes in direct proportion to a house price index, which is measured by the Småhusbarometern. The values of financial wealth and housing wealth have been calibrated for 2000 where housing wealth consists of detached houses and summer cottages. Housing prices depend on capital costs and income according to the equation
where SEUSER is the user cost of capital. The user cost of capital is defined as , where SEKP is the private capital stock and SEKPDEP is the depreciation rate of the private capital stock. One could think of this equation as being derived from the first-order condition for the housing market (the relative price of houses equals the marginal product of housing capital).
The most important links between asset markets and the real economy then work through the evolution of equity prices, housing prices, interest rates and exchange rates. The open interest rate parity determines exchange rates through
where is the current the SEK/dollar exchange rate, is the at time t expected exchange rate at time t+1, USR3M is the short run U.S. interest rate and RP is a risk premium in the foreign exchange market.
The asset prices affect the asset values and the total real net wealth
where SECED is the private
consumption deflator normalized to
where SEPINV is the implicit price index of private investments. Tobin’s Q affects private investments (business investments) SEBI.
Financial flows: The balance of payments and the financial savings
The balance of payments
The balance of payments is
where SEX is exports of goods and services, is an export price index and SEM the imports of goods and services. SEIPDC and SEIPDD are the interest profit, dividend, credit and debit respectively. SEBPT is balance of payment transfers. The equations for credits is
where SEROR is the rate of return on financial assets, SEGA is gross financial assets in US dollars and SERX the SEK/dollar exchange rate. The rate of return is exogenous and assumed to be approximately 1.5 percent. The equation for debits is
where SEGL is gross foreign liabilities, SEDEBT is government debt in real terms, SEEQPR is the rate of return on foreign liabilities and SEGIP is government interest payments. The rate of return on foreign liabilities is exogenous and assumed to be approximately 1.5 percent in the long run.
which piles up with the surplus in the balance of payments and moves in line with nominal GDP in the long run.
Gross liabilities are determined by
and piles up with the deficit in the balance of payments and otherwise go ahead with nominal GDP in the long run. It should be noted that gross foreign assets and liabilities both are adjusted with respect to the world deficit that occurs due to the measurement errors that these data contain. All in all, that means that assets and liabilities in the long run move in line with the world GDP development.
Finally, the balance of payment transfers (in real terms and deflated by the private consumption deflator) is determined by a 12-quarter moving average, which simply is written
Financial savings
As mentioned above the financial net wealth is
and by definition the change in financial net wealth is equal to the private sector savings, i.e.
additions to
For this accounting identity to hold in the data one of the components of SENW is treated as a residual. Here the residual is the miscellaneous assets variable SEMISC, which includes especially equity wealth but also the money stock.