News-Driven Housing Booms: Spain Versus Germany

Laurentiu Guinea, Luis Puch and Jesus Ruiz

The B.E. Journal of Macroeconomics, 2023, vol. 23, issue 1, 95-150

Abstract: We investigate how the economy responds to anticipated (news) shocks to future investment decisions. Using structural vector autoregressions (SVARs), we show that news about the future relative price of residential investment explains a high fraction of the variance of output, aggregate investment and residential investment for Spain. In contrast, for Germany it is the news shocks on business structures and equipment that explain a higher fraction of the variance of output, consumption and non-residential investment. We confront the identified shock with other shocks to provide evidence that our structural interpretation is valid. Then, to address our empirical findings, we propose a stylized two-sector model of the willingness to substitute current consumption for future investment in housing, structures or equipment. The model combines a wealth effect driven by the expectation of rising house prices, with a reduced-form friction in labor reallocation. We find that the model calibrated for Spain displays a response to anticipated house price shocks that stimulate residential investment, whereas for Germany those shocks enhance investment in equipment and structures. The results highlight the propagation mechanism of anticipated shocks to future investment, which is consistent with the housing booms in Spain and their absence in Germany. Such a mechanism complements a view relying on a combination of monetary, financial or housing supply and demand, surprise shocks.

Keywords: news shocks; investment-specific technical change; housing booms; wealth effects (search for similar items in EconPapers)
JEL-codes: C32 D84 E22 E32 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/bejm-2021-0116

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