Learning from House Prices: Amplification and Business Fluctuations

House Price Booms and the Current Account

Ryan Chahrour and Gaetano Gaballo

The Review of Economic Studies, 2021, vol. 88, issue 4, 1720-1759

Abstract: We formalize the idea that house price changes may drive rational waves of optimism and pessimism in the economy. In our model, a house price increase caused by aggregate disturbances may be misinterpreted as a sign of higher local permanent income, leading households to demand more consumption and housing. Higher demand reinforces the initial price increase in an amplification loop that drives comovement in output, labour, residential investment, land prices, and house prices even in response to aggregate supply shocks. The qualitative implications of our otherwise frictionless model are consistent with observed business cycles and it can explain the economic impact of apparently autonomous changes in sentiment without resorting to non-fundamental shocks or nominal rigidity.

Keywords: Demand shocks; House prices; Imperfect information; Animal spirits; D82; D83; E3 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Working Paper: Learning from House Prices: Amplification and Business Fluctuations (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:88:y:2021:i:4:p:1720-1759.

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