Question

The subject is Macroeconomics: I’d like the answer to be a rather long rant instead of short and tangible.

Many European banks have received large fines for their involvement in money laundering during recent times. Therefore, the banks need to increase their income to be able to pay off the fines. One way of doing so is by increasing their rent of allowance.

Analyse the effect in Denmark in the medium run, should the banks increase their rent of allowance. Base your analysis on the equilibrium equation: Y=Y_n

Answer 1

Impact of increase in rent allowance on CPI

Under the chain base method of housing index compilation and given a sharp increase in rentals of a subset of sample dwellings, headline inflation was expected, ex ante, to gradually increase over six months, remain elevated for another six months, and peter out of the effect thereafter. Of the sample dwellings, about 13.7 per cent are government houses (Centre, States and others). If HRA of all these houses increased by 105.6 per cent, with the weight of house rent at 9.51 per cent in CPI, the peak increase in headline inflation works out to around 140 basis points (bps). This increase sets in gradually as one-sixth of these houses are visited each month starting July 2017 and fades out in 18 months.

This can be seen to be following the equilibrium Y=Yn where the dependency of the rent allowance increase is one of direct.