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Error correction dynamics of house prices: an equilibrium benchmark

Charles Leung ()

No 177, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: Central to recent debates on the "mis-pricing" in the housing market and the proactive policy of central bank is the determination of the "fundamental house price." This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible "mis-pricing" in the housing market.

JEL-codes: E30 O40 R30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
Date: 2014-05-13
Note: Published as: Leung, Charles Ka Yui (2014), "Error Correction Dynamics of House Prices: An Equilibrium Benchmark," Journal of Housing Economics 25: 75-95.
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Journal Article: Error correction dynamics of house prices: An equilibrium benchmark (2014) Downloads
Working Paper: Error Correction Dynamics of House Prices: an Equilibrium Benchmark (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:177

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DOI: 10.24149/gwp177

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