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Housing and consumption volatility: the role of rental price rigidity

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  • Shin, Wonmun

Abstract

Business cycles in emerging economies tend to exhibit greater volatility in both housing prices and relative consumption compared to those in rich countries. This paper documents a positive cross-country relationship between house price volatility and relative consumption volatility and explores the underlying mechanisms using a small open economy model with housing and rental markets. While housing consumption, as measured by rental prices, constitutes a sizable share of total consumption, the role of the rental market has been largely overlooked. By explicitly modeling both housing and rental sectors, the paper explains a new stylized fact: housing consumption is more volatile than non-housing consumption in emerging countries. Model simulations show that financial frictions drive the positive correlation between house prices and consumption volatility, while cross-country differences in rental price rigidity explain the variation in relative housing consumption volatility. A rent rigidity index, constructed from country-level rental market characteristics, provides supporting evidence for the model’s predictions.

Suggested Citation

  • Shin, Wonmun, 2025. "Housing and consumption volatility: the role of rental price rigidity," European Economic Review, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125002016
    DOI: 10.1016/j.euroecorev.2025.105151
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    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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