Asymmetric Adjustment Costs and The Dynamics of Housing Supply
This paper considers the potential effects of asymmetric adjustment costs on the dynamics of housing supply. The model in Section 2 provides explicit microfoundations for the divergence between long and short run supply elasticities and also predicts asymmetric adjustment whereby positive deviations from equilibrium are associated with faster adjustment as compared with corresponding negative deviations. The paper also tests for asymmetric adjustment costs by estimating a number of asymmetric and/or non-linear equilibrium correction models using data on the Irish housing market. A number of interesting insights into the dynamics of housing supply have been uncovered. Firstly, and most importantly, the empirical section estimated a unit elastic equilibrium housing supply curve which suggest Irish housing supply is significantly less elastic than housing supply in other economies such as the US. The finding of only a unit elastic long-run housing supply curve means that there would appear to be significant constraints on the supply side of the market even in the long-run. Secondly, of the six models considered, all are supportive of the proposition that the adjustment costs associated with an expansion in housing output are greater than the adjustment costs associated with a contraction. This gives rise to relatively slow upward adjustment of housing output in response to a surge in demand. Thirdly, a number of the estimated models support the belief that there are threshold points on the supply side of the housing market: large deviations from equilibrium appear to be associated with faster adjustment when compared with small deviations from equilibrium. Indeed, over a small interval about the estimated equilibrium, the adjustment of housing supply is not significantly different from zero. Such inertial supply behaviour is consistent with optimising behaviour under adjustment costs non-convexities. In conclusion, it appears that the above models with both asymmetries and non-linearities can capture important empirical features of the supply side of the housing market. One not insignificant shortcoming associated with these models, however, is that it is very difficult to distinguish them in-sample from corresponding linear symmetric specifications. Only in the case of the cubic polynomial adjustment mechanism was it possible to statistically distinguish the asymmetric non-linear adjustment from a nested model with symmetric linear adjustment. Future research should therefore examine the extent to which it is possible to distinguish between competing models in terms of out-of-sample forecasting.
|Date of creation:||Apr 1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (01) 671 6666
Fax: (01) 671 6561
Web page: http://www.centralbank.ieEmail:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-79, December.
- Holly, Sean & Jones, Natasha, 1997. "House prices since the 1940s: Cointegration, demography and asymmetries," Economic Modelling, Elsevier, vol. 14(4), pages 549-565, October.
- Anderson, Heather M, 1997. "Transaction Costs and Non-linear Adjustment towards Equilibrium in the US Treasury Bill Market," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 465-84, November.
- Pfann, Gerard A., 1996. "Factor demand models with nonlinear short-run fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 315-331.
- Giuseppe Bertola & Ricardo J. Caballero, 1990.
"Kinked Adjustment Costs and Aggregate Dynamics,"
in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296
National Bureau of Economic Research, Inc.
- Pfann, Gerald A. & Verspagen, Bart, 1989. "The structure of adjustment costs for labour in the Dutch manufacturing sector," Economics Letters, Elsevier, vol. 29(4), pages 365-371.
- Pesaran, M.H., 1992. "A Generalised R2 Criterion for Regression Models Estimated by the Instrumental Variable Method," Cambridge Working Papers in Economics 9220, Faculty of Economics, University of Cambridge.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
- Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August.
- Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
- Escribano, Alvaro & Pfann, Gerard A., 1998. "Non-linear error correction, asymmetric adjustment and cointegration," Economic Modelling, Elsevier, vol. 15(2), pages 197-216, April.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Kenny, Geoff, 1999.
"Asymmetric Adjustment Costs and The Dynamics of Housing Supply,"
Research Technical Papers
3/RT/99, Central Bank of Ireland.
- Kenny, Geoff, 2003. "Asymmetric adjustment costs and the dynamics of housing supply," Economic Modelling, Elsevier, vol. 20(6), pages 1097-1111, December.
- Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages S145-59, Supplemen.
- Kenny, Geoff, 1999. "Modelling the demand and supply sides of the housing market: evidence from Ireland1," Economic Modelling, Elsevier, vol. 16(3), pages 389-409, August.
When requesting a correction, please mention this item's handle: RePEc:cbi:wpaper:3/rt/99. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Smith)
If references are entirely missing, you can add them using this form.