Bubbly Booms and Welfare

Feng Dong, Yang Jiao and Haoning Sun
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Yang Jiao: Fudan University

Review of Economic Dynamics, 2024, vol. 53, 71-122

Abstract: We show the competing effects of a housing bubble on the real economy by developing a multi-sector dynamic model with housing production. On the one hand, firms can sell or collateralize their housing, so a housing bubble helps firms obtain credit to finance their investment and expand production. On the other hand, a boom in the housing sector crowds out labor in the non-housing sector. We show that housing booms can reduce social welfare both in the steady state and in the transitional dynamics only when the production externalities in the non-housing sector are sufficiently large. We quantitatively evaluate our model and demonstrate its robustness with model extensions. Policies that target labor, housing transactions and output generate different welfare implications. (Copyright: Elsevier)

Keywords: Housing Bubble; Credit Constraint; Collateral Effect; Crowd-out Effect; Housing Policies (search for similar items in EconPapers)
JEL-codes: D92 E22 E44 E62 G1 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1016/j.red.2024.02.001

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