Housing market dynamics and welfare

Büyükkarabacak, Berrak and Mykhaylova, Olena (2010): Housing market dynamics and welfare.

Abstract

We augment a closed-economy DSGE model with collateral constraints tied to real estate values by incorporating the time-to-build phenomenon in the housing construction sector. Adding construction sector delays significantly improves business cycle properties of the model relative to the versions with no time-to-build delays or with permanently fixed housing stock. We also find that in the presence of construction lags adding housing prices to the central bank policy function increases aggregate welfare in the economy by up to 0.3 percent of consumption. This result is robust to several specifications of the Taylor rule and to changes in key parameter values.

• Item Type: MPRA Paper
• Language: English
• Keywords: Housing prices; housing construction; time-to-build; welfare.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Aoki, K., J. Proudman and G. Vlieghe (2004). House Prices, Consumption, and Monetary Policy: a Financial Accelerator Approach. Journal of Financial Intermediation, 13, 414-435.

Ayuso, J. and F. Restoy (2007). House Prices and Rents in Spain: Does the Discount Factor Matter? Journal of Housing Economics, 16, 291-�308.

Barsky, R., C. House and M. Kimball (2007). Sticky Price Models and Durable Goods. American Economic Review, 97, 984-998.

Bayoumi, T., D. Laxton and P. Pesenti (2004). Bene�ts and Spillovers of Greater Competition in Europe: A Macroeconomic Assessment. NBER Working Paper No. 10416.

Bernanke, B., and M. Gertler (2001). Should Central Bankers Respond to Asset Prices? American Economic Review Papers and Proceedings, 91, 253-257.

Bernanke, B., M. Gertler and S. Gilchrist (1999). The Financial Accelerator in a Quantitative Business Cycle Framework, in J. Taylor and M. Woodford (eds.), The Handbook of Macroeconomics, Amsterdam: North-Holland.

Calvo, G. (1983). Staggered Prices in a Utility-Maximizing Framework. Journal of Monetary Economics, 12, 383-398.

Campbell, J., and J. Cocco (2007). How do House Prices Affect Consumption? Evidence from Micro Data. Journal of Monetary Economics, 54, 591-621.

Carstensen, K., O. Hülsewig and T. Wollmershäuser (2009). Monetary Policy Transmission and House Prices: European Cross-Country Evidence. CESifo Working Paper No. 2750

Cecchetti, S. (2007). Measuring the Macroeconomic Risks Posed by Asset Price Booms, in J. Campbell (ed.), Asset Prices and Monetary Policy, Chicago, Ill.: University of Chicago Press for NBER.

Chari, V.V., P. Kehoe and E. McGrattan (2009). New Keynesian Models: Not Yet Useful for Policy Analysis. American Economic Journal: Macroeconomics, 1, 242-266.

Collard, F., and M. Juillard. Stochastic simulations with DYNARE. A practical guide. CEPREMAP, 2003. (http://www.cepremap.cnrs.fr/dynare/)

Davis, M. and J. Heathcote (2005). Housing and the Business Cycle. International Economic Review, 46, 751-784.

Dhyne, E., L.J. Álvarez, H. Le Bihan, G. Veronese, D. Dias, J. Hoffman, N. Jonker, P. Lünnemann, F. Rumler and J. Vilmunen (2006). Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data. Journal of Economic Perspectives, 20, 171-�192.

Díaz-Roldán, C. and A. Montero-Soler (2004). Las reglas de política monetaria en la actuación del Banco de España: 1978-1998. Revista de Economía Aplicada, 34, 39-51.

Diewert, W. (2002). Harmonized Indexes of Consumer Prices: Their Conceptual Foundations. Swiss Journal of Economics and Statistics, 138, 547-637.

Esteban, M. and A. Altuzarra (2008). A Model of the Spanish Housing Market. Journal of Post Keynesian Economics, 30, 353-373.

Gilchrist, S. and J. Leahy (2002). Monetary Policy and Asset Prices. Journal of Monetary Economics, 49, 75-97.

Goodhart, C. and B. Hofmann (2007). House Prices and the Macroeconomy: Implications for Banking and Price Stability. Oxford University Press.

Gomme P., F. Kydland and P. Rupert (2001). Home Production Meets Time to Build. Journal of Political Economy, 109, 1115-1131.

Gorter, J. (2005). Subjective Expectations and New Keynesian Phillips Curves in Europe. De Nederlandsche Bank Working Paper No. 49.

Iacoviello, M. (2005). House Prices, Borrowing Constraints and Monetary Policy in the Business Cycle. American Economic Review, 95, 739-764.

Iacoviello, M. and S. Neri (2010). Housing Market Spillovers: Evidence from an Estimated DSGE Model. American Economic Journal: Macroeconomics, 2, 125-1�64.

Kydland, F. and E. Prescott (1982). Time to Build and Aggregate Fluctuations. Econometrica, 50, 1345-70.

Mendicino, C. and A. Pescatori (2008). Credit Frictions, Housing Prices and Monetary Policy Rules. Working Paper 04/42 Università Roma.

Monacelli, T. (2009). New Keynesian Models, Durable Goods, and Collateral Constraints. Journal of Monetary Economics, 56, 242-254.

Mykhaylova, O. (2009). Welfare Implications of Country Size In a Monetary Union. University of Richmond Working Paper.

Roubini, N. (2006). Why Central Banks Should Burst Bubbles. International Finance, 9, 87-107.

Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.