Depreciation: a Dangerous Affair

Cozzi, Guido (2017): Depreciation: a Dangerous Affair.

Abstract

What if the statutory fiscal depreciation of buildings was higher than their effective economic depreciation? This would imply that markets would value buildings more than their social fundamental value. I prove that this would allow house price bubbles to emerge and open the door to sudden crashes. This paper provides an example of how a misaligned fiscal policy measure could generate potentially destabilizing self-fulfilling prophecies even in an economy with fully rational and forward-looking individuals.

• Item Type: MPRA Paper
• Language: English
• Keywords: House price bubbles; Fiscal depreciation; Sunspot equilibria.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location

References

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