House Prices and Government Spending Shocks

Hashmat Khan () and Abeer Reza

No 13-10, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We show that DSGE models with housing and collateralized borrowing predict a fall in house prices following positive government spending shocks. By contrast, we show that house prices in the US rise persistently after identified positive government spending shocks. We clarify that the incorrect house price response is due to a general property of DSGE models-approximately constant shadow value of housing-and that modifying preferences and production structure cannot help in obtaining the correct house price response. Properly accounting for the empirical evidence on government spending shocks and house prices using a DSGE model therefore remains a significant challenge.

Keywords: House prices; Government spending shocks (search for similar items in EconPapers)
JEL-codes: E21 E44 E62 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013-12-20, Revised 2016-09-14
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published: Carleton Economic Papers

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Journal Article: House Prices and Government Spending Shocks (2017)
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