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The Macroeconomic E¤ects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium

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  • Sydney Ludvigson

    (New York University)

  • Stijn Van Nieuwerburgh

    (New York University)

  • Jack Favilukis

    (London School of Economics)

Abstract

bond markets calibrated to match the increase in foreign ownership of U.S. Treasury and agency debt from 2000-2007 generates an increase in national price-rent ratios comparable to that observed in U.S. data over this period. Moreover, in a simulated transition for the period 2000-2009, the model generates a decline of greater than 16% in national house price-rent ratios in the two year period 2007 to 2009, driven by the economic contraction and by a presumed reversal of the financial market liberalization. A financial market liberalization drives risk premia in both the housing and equity market down, shifts the composition of wealth for all age and income groups towards housing, and leads to a short-run boom in aggregate consumption but a short-run bust in investment. By contrast, although an influx of foreign capital into the domestic bond market reduces interest rates, it increases risk premia in both the housing and equity markets. Finally, the model implies that procyclical increases in equilibrium price-rent ratios reflect expectations of lower future housing returns, not higher future rents.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 733.

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Date of creation: 2010
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Handle: RePEc:red:sed010:733

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  1. N. Gregory Mankiw, 1987. "The Equity Premium and the Concentration of Aggregate Shocks," NBER Working Papers 1788, National Bureau of Economic Research, Inc.
  2. Zheng Liu & Pengfei Wang & Tao Zha, 2013. "Land‐Price Dynamics and Macroeconomic Fluctuations," Econometrica, Econometric Society, vol. 81(3), pages 1147-1184, 05.
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  10. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
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  12. Eva Carceles-Poveda & Daniele Coen Pirani, 2010. "Owning Capital or Being Shareholders: An Equivalence Result with Incomplete Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 537-558, July.
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