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A Theory of Housing Demand Shocks

Zheng Liu (), Pengfei Wang () and Tao Zha ()

No 2019-4, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the ?price-rent puzzle?). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.

Keywords: price-rent puzzle; heterogeneity; marginal agent; cutoff point; liquidity premium; price-to-rent ratio; collateral constraint (search for similar items in EconPapers)
JEL-codes: E21 E44 G21 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-03-01
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:2019-04

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DOI: 10.29338/wp2019-04

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