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Housing market dynamics and welfare

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  • Büyükkarabacak, Berrak
  • Mykhaylova, Olena

Abstract

We augment a closed-economy DSGE model with collateral constraints tied to real estate values by incorporating the time-to-build phenomenon in the housing construction sector. Adding construction sector delays significantly improves business cycle properties of the model relative to the versions with no time-to-build delays or with permanently fixed housing stock. We also find that in the presence of construction lags adding housing prices to the central bank policy function increases aggregate welfare in the economy by up to 0.3 percent of consumption. This result is robust to several specifications of the Taylor rule and to changes in key parameter values.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23322.

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Date of creation: 15 Jun 2010
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Handle: RePEc:pra:mprapa:23322

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Keywords: Housing prices; housing construction; time-to-build; welfare.;

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References

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  2. Marisol Esteban & Amaia Altuzarra, 2008. "A model of the Spanish housing market," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 30(3), pages 353-373, April.
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  9. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 739-764, June.
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  11. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  12. Ayuso, Juan & Restoy, Fernando, 2007. "House prices and rents in Spain: Does the discount factor matter?," Journal of Housing Economics, Elsevier, Elsevier, vol. 16(3-4), pages 291-308, November.
  13. Caterina Mendicino & Andrea Pescatori, 2004. "Credit Frictions, housing prices and optimal monetary policy Rules," Departmental Working Papers of Economics - University 'Roma Tre', Department of Economics - University Roma Tre 0042, Department of Economics - University Roma Tre.
  14. Diewert, Erwin, 2002. "Harmonized indexes of consumer prices: their conceptual foundations," Working Paper Series, European Central Bank 0130, European Central Bank.
  15. Janko Gorter, 2005. "Subjective Expectations and New Keynesian Phillips Curves in Europe," DNB Working Papers, Netherlands Central Bank, Research Department 049, Netherlands Central Bank, Research Department.
  16. Paul Gomme & Finn E. Kydland & Peter Rupert, 2001. "Home Production Meets Time to Build," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(5), pages 1115-1131, October.
  17. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(2), pages 171-192, Spring.
  18. Mykhaylova, Olena, 2009. "Welfare implications of country size in a monetary union," MPRA Paper 23323, University Library of Munich, Germany.
  19. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  20. Nouriel Roubini, 2006. "Why Central Banks Should Burst Bubbles," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(1), pages 87-107, 05.
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