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Risk Shocks and Housing Markets

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Author Info

  • Dorofeenko, Victor

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Lee, Gabriel S.

    (IREBS, University of Regensburg, Regensburg, Germany, and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Salyer, Kevin D.

    (Department of Economics, University of California, Davis, USA)

Abstract

This paper analyzes the role of uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for the business cycle. Also, we demonstrate that bankruptcy costs act as an endogenous markup factor in housing prices; as a consequence, the volatility of housing prices is greater than that of output, as observed in the data. The model can also account for the observed countercyclical behavior of risk premia on loans to the housing sector.

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File URL: http://www.ihs.ac.at/publications/eco/es-249.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 249.

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Length: 42 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:ihs:ihsesp:249

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Related research

Keywords: Agency costs; credit channel; time-varying uncertainty; residential investment; housing production; calibration;

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References

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  1. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta-Eksten & Stephen Terry, 2013. "Really Uncertain Business Cycles," CEP Discussion Papers dp1195, Centre for Economic Performance, LSE.
  2. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
  3. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  4. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers 449, University of Rochester - Center for Economic Research (RCER).
  5. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2004. "The great depression and the Friedman-Schwartz hypothesis," Working Paper Series 326, European Central Bank.
  6. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  7. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers: Evidence from an estimated DSGE model," Temi di discussione (Economic working papers) 659, Bank of Italy, Economic Research and International Relations Area.
  8. Iacoviello, Matteo & Minetti, Raoul, 2008. "The credit channel of monetary policy: Evidence from the housing market," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 69-96, March.
  9. Salyer, Kevin & Lee, Gabriel, 2006. "Time-Varying Uncertainty and the Credit Channel," Working Papers 06-1, University of California at Davis, Department of Economics.
  10. Morris Davis & Jonathan Heathcote, 2004. "Housing and the business cycle," Finance and Economics Discussion Series 2004-11, Board of Governors of the Federal Reserve System (U.S.).
  11. Pablo A. Guerron-Quintana & Martin Uribe & Juan Rubio-Ramirez & Jesús Fernández-Villaverde, 2009. "Risk Matters: The Real E¤ects of Volatility Shocks," 2009 Meeting Papers 237, Society for Economic Dynamics.
  12. Joseph Gyourko & Eduardo Morales & Charles Nathanson & Edward Glaeser, 2011. "Housing Dynamics," 2011 Meeting Papers 307, Society for Economic Dynamics.
  13. Jonas D. M. Fisher, 2007. "Why Does Household Investment Lead Business Investment over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 115, pages 141-168.
  14. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
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Cited by:
  1. Viktor Dorofeenko & Gabriel S. Lee & Kevin D. Salyer, 2011. "Rationale Erklärungen für Immobilienpreis‐Bubbles: Die Auswirkungen von Risikoschocks auf die Wohnimmobilienpreisvolatilität und die Volatilität von Investitionen in Wohnimmobilien," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(2), pages 151-169, 05.

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