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Housing Prices and the Business Cycle: An Empirical Application to Hong Kong

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  • Michael Funke
  • Michael Paetz

Abstract

This paper develops a two-agent, two-sector, open-economy DSGE model with a housing-market sector and a borrowing constraint. Contrary to standard conventions, domestic households are allowed to invest in foreign housing and vice versa. Using Bayesian methods, the model is applied to data for Hong Kong. We identify strong and robust housing wealth effects, and show that property prices are mainly driven by intratemporal preference perturbations rather than by disturbances in financial frictions or price mark up shocks. These disturbances also explain a non-negligible part of the volatility of consumption, GDP and employment.

Suggested Citation

  • Michael Funke & Michael Paetz, 2011. "Housing Prices and the Business Cycle: An Empirical Application to Hong Kong," Quantitative Macroeconomics Working Papers 21112b, Hamburg University, Department of Economics.
    • Handle: RePEc:ham:qmwops:21112b
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    More about this item

    Keywords

    DSGE models; housing; open economy; Hong Kong;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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