IDEAS home Printed from https://ideas.repec.org/p/fip/fedawp/2019-04.html
   My bibliography  Save this paper

A Theory of Housing Demand Shocks

Author

Listed:
  • Liu, Zheng

    () (Federal Reserve Bank of San Francisco)

  • Wang, Pengfei

    () (Hong Kong University of Science and Technology)

  • Zha, Tao

    () (Federal Reserve Bank of Atlanta)

Abstract

Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.

Suggested Citation

  • Liu, Zheng & Wang, Pengfei & Zha, Tao, 2019. "A Theory of Housing Demand Shocks," FRB Atlanta Working Paper 2019-4, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2019-04
    DOI: 10.29338/wp2019-04
    as

    Download full text from publisher

    File URL: https://www.frbatlanta.org/-/media/documents/research/publications/wp/2019/04-a-theory-of-housing-demand-shocks-2019-03-25.pdf
    File Function: Full text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dong, Feng & Wen, Yi, 2019. "Long and Plosser meet Bewley and Lucas," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 70-92.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. repec:aea:jecper:v:32:y:2018:i:3:p:31-58 is not listed on IDEAS
    4. Atif R. Mian & Amir Sufi, 2018. "Finance and Business Cycles: The Credit-Driven Household Demand Channel," NBER Working Papers 24322, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    price-rent puzzle; heterogeneity; marginal agent; cutoff point; liquidity premium; price-to-rent ratio; collateral constraint;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedawp:2019-04. 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: (Elaine Clokey). General contact details of provider: http://edirc.repec.org/data/frbatus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.