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Expectations and Macro-Housing Interactions in a Small Open Economy: Evidence from Korea

Author

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  • Fabio Milani

    (University of California)

  • Sung Ho Park

    (Bank of Korea)

Abstract

This paper studies the interaction between the housing sector and the macroeconomic environment in Korea. Besides serving as a typical small open economy, Korea provides an interesting laboratory case, since the country was subject to various housing-cycle phases over the sample, and its policymakers implemented active policies to stabilize the housing market. We present a microfounded open-economy model extended to incorporate a housing sector. The model is estimated using Bayesian methods and a large set of observables. We highlight the role of assumptions about house-price expectations on economic dynamics. In the benchmark case of rational expectations, the spillovers from housing to macro variables are modest. House prices are largely driven by sector-specific demand and supply shocks. Business cycle fluctuations are mostly driven by open-economy shocks. When the assumption of rational expectations is relaxed in favor of extrapolative expectations, however, the impact of the housing sector increases. Macroeconomic spillovers from the housing market become more important, with housing shocks accounting for up to twenty percent of fluctuations in the broader economy.

Suggested Citation

  • Fabio Milani & Sung Ho Park, 2019. "Expectations and Macro-Housing Interactions in a Small Open Economy: Evidence from Korea," Open Economies Review, Springer, vol. 30(2), pages 375-402, April.
  • Handle: RePEc:kap:openec:v:30:y:2019:i:2:d:10.1007_s11079-018-9508-x
    DOI: 10.1007/s11079-018-9508-x
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    References listed on IDEAS

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    Cited by:

    1. Benjamin Kwakye & Chan Tze Haw, 2020. "Interplay of the Macroeconomy and Real Estate: Systematic Review of Literature," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 262-271.

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    More about this item

    Keywords

    Housing market-macroeconomy nexus; House prices; Non-rational expectations; Macroprudential policies; Household credit; Small open economy model; Korea’s economy;
    All these keywords.

    JEL classification:

    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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