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Housing and Liquidity

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  • Yu Zhu

    (University of Wisconsin - Madison)

  • Randall Wright

    (University of Wisconsin)

  • Chao He

    (Renmin University of China)

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Abstract

Housing, in addition to providing direct utility, facilitates credit transactions when home equity serves as collateral. We document big increases in home-equity loans coinciding with the start of the house-price boom, and suggest an explanation. When it is used as collateral, housing can bear a liquidity premium. Since liquidity is endogenous, even when fundamentals are deterministic and time invariant equilibrium house prices can display complicated patterns -- including cyclic, chaotic and stochastic trajectories -- some of which resemble bubbles. Our framework is tractable, with exogenous or with endogenous supply, and with exogenous or endogenous credit limits. Yet it captures several salient qualitative features of actual housing markets. Numerical work shows the model can also capture some, if not all, quantitative features, as well. The effects of monetary policy are also discussed.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 168.

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Date of creation: 2013
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Handle: RePEc:red:sed013:168

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Cited by:
  1. Pengfei Wang & Lifang Xu & Jianjun Miao, 2013. "Stock Market Bubbles and Unemployment," 2013 Meeting Papers, Society for Economic Dynamics 720, Society for Economic Dynamics.
  2. Guillaume Rocheteau & Randall Wright, 2010. "Liquidity and asset market dynamics," Working Paper 1016, Federal Reserve Bank of Cleveland.
  3. Nikolai Roussanov & Michael Michaux & Hui Chen, 2011. "Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty," 2011 Meeting Papers 1369, Society for Economic Dynamics.
  4. Dietrich, Diemo & Hauck, Achim, 2014. "Bank capital regulation, loan contracts, and corporate investment," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 230-241.
  5. Venky Venkateswaran & Randall Wright, 2013. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Working Papers 19009, National Bureau of Economic Research, Inc.

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