Beliefs, Aggregate Risk, and the U.S. Housing Boom

Margaret Jacobson

No 1549, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper investigates the quantitative importance of the interaction of beliefs with credit conditions in explaining the run-up of house prices during the U.S. housing boom. To allow for interacting beliefs and credit conditions while maintaining computational tractability, I will introduce adaptive expectations into a general equilibrium life-cycle model with aggregate risk, incomplete markets, and defaultable debt. I will compare results from the model solved under adaptive expectations derived from ZIP code level house price data to results solved under rational expectations. Although house prices grew by 40 percent relative to their pre-boom level in the data, positive income shocks only generate a 5 percent increase in house prices under rational expectations in the model.

Date: 2019
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
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Working Paper: Beliefs, Aggregate Risk, and the U.S. Housing Boom (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1549

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