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Borrowing Constraints and House Price Dynamics: The Case of Large Shocks

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  • Eerola Essi

    (Government Institute for Economic Research)

  • Määttänen Niku

    (The Research Institute of the Finnish Economy and Helsinki Center of Economic Research)

Abstract

We study how household borrowing constraints shape house price dynamics. We consider the fully non-linear dynamics following large aggregate shocks in a calibrated OLG model with standard preferences. We find that the main effect of a down payment constraint is to make house price dynamics asymmetric between large positive and large negative income shocks: prices increase rapidly following the impact effect of a large adverse income shock but decline slowly following the impact effect of a positive income shock. This asymmetry stems from the fact that the share of borrowing constrained households changes over time. However, the down payment constraint does not substantially magnify the impact effect of adverse income or interest rate shocks.

Suggested Citation

  • Eerola Essi & Määttänen Niku, 2012. "Borrowing Constraints and House Price Dynamics: The Case of Large Shocks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(3), pages 1-36, September.
    • Handle: RePEc:bpj:sndecm:v:16:y:2012:i:3:n:2
    DOI: 10.1515/1558-3708.1888
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    References listed on IDEAS

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    Cited by:

    1. Eerola, Essi & Määttänen, Niku, 2013. "Matching in the housing market with risk aversion and savings," ETLA Working Papers 3, The Research Institute of the Finnish Economy.

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