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Housing Market Spillovers: Evidence from an Estimated DSGE Model

  • Matteo Iacoviello

    ()

    (Boston College)

  • Stefano Neri

    (Banca D'Italia)

Using U.S. data and Bayesian methods, we quantify the contribution of the housing market to business fluctuations. The estimated model, which contains nominal and real rigidities and collateral constraints, is used to address two questions. First, what shocks drive the housing market? We find that the upward trend in real housing prices of the last 40 years can be explained by slow technological progress in the housing sector. Over the business cycle instead, housing demand and housing technology shocks account for roughly one-quarter each of the volatility of housing investment and housing prices. Monetary factors account for about 20 percent, but they played a major role in the housing market cycle at the turn of the century. Second, do fluctuations in the housing market propagate to other forms of expenditure? We find that the spillovers from the housing market to the broader economy are non-negligible, concentrated on consumption rather than business investment, and they have become more important over time, to the extent that financial innovation has increased the marginal availability of funds for credit-constrained agents.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 659.

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Length: 46 pages
Date of creation: 25 Mar 2007
Date of revision: 23 Oct 2009
Publication status: forthcoming, American Economic Journals: Macroeconomics
Handle: RePEc:boc:bocoec:659
Note: previously circulated as "The Role of Housing Collateral in an Estimated Two-Sector Model of the U.S. Economy"
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