Housing Market Freezes, Deleveraging, and Aggregate Demand

Christian Bayer and Ralph Luetticke

No 1069, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a general equilibrium model of incomplete markets, liquid paper assets and illiquid housing. Housing liquidity fluctuates significantly over time and systematically so over the business cycle. A decrease in the liquidity of housing leads to an increased demand for liquid paper assets and a decrease in demand for houses (as assets). We show that the model generates substantial business cycle effects of fluctuations in housing liquidity on house prices, employment and output, while being in line with relatively small fluctuations in rental rates of housing. We find that low housing liquidity during the Great Recession offers a novel explanation for the sharp decline in interest rates on government bonds.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1069

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