IDEAS home Printed from https://ideas.repec.org/p/arz/wpaper/eres2006_178.html
   My bibliography  Save this paper

A Role Of Credit Channel And Uncetainty On Housing And Business Cycle

Author

Listed:
  • Victor Dorofeenko
  • Gabriel Lee
  • Kevin D. Salyer

Abstract

We consider the role uncertainty in incomplete markets environment that includes housing sector. Frictions such as poorly functioning rental and mortgage markets are likely important in accounting for cross-sectional issues such as life-cycle consumption and savings patterns. To incorporate some of the aforementioned frictions, we extend the Carlstrom and Fuerst (1997) agency cost model of business cycles by including time varying uncertainty in the technology shocks that affect housing and home capital production (in the setting of Davis and Heathcote (2005)). We first demonstrate that standard linearization methods can be used to solve the model yet second moment effects still influence equilibrium characteristics. The effects of the persistence of uncertainty are then analyzed. Our primary findings fall into four categories. First, it is demonstrated that uncertainty affects the level of the steady-state of the economy so that welfare analyses of uncertainty that focus entirely on the variability of output (or consumption) will understate the true costs of uncertainty. A second key result is that time varying uncertainty results in countercyclical bankruptcy rates - a finding which is consistent with the data and opposite the result in Carlstrom and Fuerst. Third, we show that persistence of uncertainty affects both quantitatively and qualitatively the behavior of the U.S. housing stylized facts: In particular, we show that the percentage standard deviation of residential investment is more than twice that of non-residential investment. Our model can also account for important features of industry-level data. In particular, hours and output in all industries are positively correlated, and are most volatile in construction. Finally, we find evidence for time-varying uncertainty in industry level productivity growth; however, the shocks to uncertainty imply a quantitatively small role for uncertainty over the housing and business cycle.

Suggested Citation

  • Victor Dorofeenko & Gabriel Lee & Kevin D. Salyer, 2006. "A Role Of Credit Channel And Uncetainty On Housing And Business Cycle," ERES eres2006_178, European Real Estate Society (ERES).
  • Handle: RePEc:arz:wpaper:eres2006_178
    as

    Download full text from publisher

    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2006-178
    Download Restriction: no
    ---><---

    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arz:wpaper:eres2006_178. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Architexturez Imprints (email available below). General contact details of provider: https://edirc.repec.org/data/eressea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.