Researchers from Creates are granted DKK 6.4 million

The Social Sciences (FSE) department under the Danish Council for Independent Research has granted a total of DKK 6.4 million to two new research projects led by Associate Professor Thomas Quistgaard Pedersen and Associate Professor Martin Møller Andreasen.

What drives prices in the international housing market in light of the large fluctuations in house prices that we have seen in recent years? Is it possible to forecast house price movements by drawing on information from the financial markets and the macroeconomy? What determines interest rates on long-term loans, and how do short and long-term loans influence economic activity?

These are just some of the questions that Associate Professor Thomas Quistgaard Pedersen and Associate Professor Martin Møller Andreasen are asking in their new research projects, which have just received substantial funding from the Danish Council for Independent Research – Social Sciences (FSE).

The two new projects: 

Project title: Explaining the macroeconomic foundation behind long-term nominal interest rates and their effects on the real economy

Grant recipient: Martin Møller Andreasen
Institution: Creates, Department of Economics and Business, Aarhus University
Amount granted: DKK 2,589,961

Project description:
The purpose of this research project is to include long-term loan agreements in more recent macroeconomic models, thereby enhancing our understanding of what determines long-term interest rates and how these interest rates influence the macroeconomy. The current class of macro-finance models used to understand economic activity typically assumes that all households and firms only rely on short-term loan rates with maturities between 3 and 12 months, meaning that these models do not assign any role to long-term interest rates, i.e. 10- to 30-year interest rates. Accordingly, the models cannot be used to analyse how the economy is influenced by the recent development in the Danish housing market where people gradually have moved away from 30-year fixed mortgage rates towards short-term floating rates. Similarly, the models cannot be used to understand the recent unconventional monetary policy in the UK and US, where central banks have undertaken bond buying programs to reduce long-term interest rates to further stimulate their economies. We hope that the models developed in this research project will improve our understanding of long-term interest rates. Such insights might also be beneficial to policy makers when deciding whether and how to regulate financial institutions in the Danish housing market.

Project title: The International Housing Market: What Drives Prices and their Comovement?

Grant recipient: Thomas Quistgaard Pedersen
Institution: Aarhus University
Amount granted: DKK 3,856,032

Project description:
Throughout the last 15-20 years, the international housing market has experienced large price movements. Many countries, including Denmark, experienced increasing real house prices over the course of many years up to around 2006, after which prices fell dramatically. From a socio-economic perspective, large price movements in the housing market are undesirable, because decreasing house prices often lead to a significant reduction in household consumption, and this in turn increases the risk of recession and destabilisation of the economy; a consequence many countries have experienced in recent years. Hence, understanding the underlying causes for price movements in the housing markets is important, so that we can avoid future economic crises originating in the housing market. In light of the large house price fluctuations we have witnessed in recent years this research project aims to analyse price movements in the international housing market. Among other things, the project seeks to examine if the large price increases up to around 2006 could be due to bubbles in the housing markets, or if they could be explained by, for example, financial market liberalization. Likewise, the project will focus on the housing markets’ central role in the overall economy, analysing whether it is possible to forecast house prices using information from financial markets and the macro-economy. The project has a strong international focus, analysing cross-country differences and similarities as well as the degree of international integration and contagion.

In June, a total of seven researchers from School of Business and Social Sciences, under which the Department of Economics and Business belongs, received research grants from FSE to fund their projects.

Read descriptions of all the BSS projects that received funding (in Danish only).