EconPapers    
Economics at your fingertips  
 

House prices, endogenous productivity, and the effects of government spending shocks

Rasmus Bisgaard Larsen, Søren Hove Ravn and Emiliano Santoro

European Economic Review, 2025, vol. 172, issue C

Abstract: We present aggregate and regional evidence showing that U.S. house prices increase persistently in response to positive shocks to fiscal spending. In sharp contrast to this, house prices decline in conventional dynamic general equilibrium models, where shocks that have short-lived effects on the shadow value of housing inevitably generate negative comovement between households’ marginal utility of consumption and house prices (see Barsky et al., 2007). In response to an increase in government spending, the negative wealth effect exerted by the simultaneous increase in the present-value tax burden increases the marginal utility of consumption. Even overcoming the consumption crowding-out puzzle is not sufficient to resolve this shortcoming. To tackle this problem, we extend an otherwise standard model embedding a lender-borrower relationship with alternative – yet, potentially complementary – propagation channels that leverage the expansion in total factor productivity stemming from a positive shock to fiscal spending, so as to contrast the negative wealth effect of higher taxes. This class of models succeeds in generating a persistent expansion in house prices, although the propagation required to match the data is stronger – in some cases significantly so – than what is typically found in the literature. The positive interplay between house prices and productivity finds support in both aggregate and regional data.

Keywords: Fiscal policy; House prices; Endogenous total factor productivity (search for similar items in EconPapers)
JEL-codes: E13 E20 E32 E62 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292124002666
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:172:y:2025:i:c:s0014292124002666

DOI: 10.1016/j.euroecorev.2024.104937

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2025-03-23
Handle: RePEc:eee:eecrev:v:172:y:2025:i:c:s0014292124002666