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Housing Prices and the Business Cycle: An Empirical Application to Hong Kong

  • Michael Funke

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  • Michael Paetz

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This paper develops a two-agent, two-sector, open-economy DSGE model with a housing-market sector and a borrowing constraint. Contrary to standard conventions, domestic households are allowed to invest in foreign housing and vice versa. Using Bayesian methods, the model is applied to data for Hong Kong. We identify strong and robust housing wealth effects, and show that property prices are mainly driven by intratemporal preference perturbations rather than by disturbances in financial frictions or price mark up shocks. These disturbances also explain a non-negligible part of the volatility of consumption, GDP and employment.

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Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 21112b.

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Date of creation: Dec 2011
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Handle: RePEc:ham:qmwops:21112b
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  1. Funke, Michael & Paetz, Michael & Pytlarczyk, Ernest, 2011. "Stock market wealth effects in an estimated DSGE model for Hong Kong," Economic Modelling, Elsevier, vol. 28(1), pages 316-334.
  2. Margarita Rubio, 2009. "Housing market heterogeneity in a monetary union," Banco de Espa�a Working Papers 0916, Banco de Espa�a.
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  7. Gerlach, Stefan & Peng, Wensheng, 2005. "Bank lending and property prices in Hong Kong," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 461-481, February.
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  14. Funke, Michael & Paetz, Michael, 2012. "A DSGE-Based Assessment of Nonlinear Loan-to-Value Policies: Evidence from Hong Kong," BOFIT Discussion Papers 11/2012, Bank of Finland, Institute for Economies in Transition.
  15. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  16. Matteo Iacoviello, 2004. "Consumption, House Prices and Collateral Constraints: a Structural Econometric Analysis," 2004 Meeting Papers 201, Society for Economic Dynamics.
  17. Darracq Pariès, Matthieu & Notarpietro, Alessandro, 2008. "Monetary policy and housing prices in an estimated DSGE for the US and the euro area," Working Paper Series 0972, European Central Bank.
  18. Monacelli, Tommaso, 2006. "New Keynesian Models, Durable Goods and Collateral Constraints," CEPR Discussion Papers 5916, C.E.P.R. Discussion Papers.
  19. Oriol Aspachs-Bracons & Pau Rabanal, 2011. "The Effects of Housing Prices and Monetary Policy in a Currency Union," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 225-274, March.
  20. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  21. Eva Ortega & Margarita Rubio & Carlos Thomas, 2011. "House purchase versus rental in Spain," Banco de Espa�a Working Papers 1108, Banco de Espa�a.
  22. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  23. Matteo Iacoviello & Raoul Minetti, 2002. "The Credit Channel of Monetary Policy: Evidence from the Housing Market," Boston College Working Papers in Economics 541, Boston College Department of Economics, revised 29 Aug 2003.
  24. Ho, Lok Sang & Wong, Gary Wai-chung, 2009. "The first step on the housing ladder: A natural experiment in Hong Kong," Journal of Housing Economics, Elsevier, vol. 18(1), pages 59-67, March.
  25. Raymond Tse & C. W. Ho & S. Ganesan, 1999. "Matching housing supply and demand: an empirical study of Hong Kong's market," Construction Management and Economics, Taylor & Francis Journals, vol. 17(5), pages 625-633.
  26. Alessandro Calza & Tommaso Monacelli & Livio Stracca, 2013. "Housing Finance And Monetary Policy," Journal of the European Economic Association, European Economic Association, vol. 11, pages 101-122, 01.
  27. Chan, Hing Lin & Lee, Shu Kam & Woo, Kai Yin, 2001. "Detecting rational bubbles in the residential housing markets of Hong Kong," Economic Modelling, Elsevier, vol. 18(1), pages 61-73, January.
  28. Ernest Pytlarczyk, 2005. "An Estimated DSGE Model for The German Economy," Computing in Economics and Finance 2005 318, Society for Computational Economics.
  29. Matthew S. Yiu & Lu Jin, 2012. "Detecting Bubbles in the Hong Kong Residential Property Market: An Explosive-Pattern Approach," Working Papers 012012, Hong Kong Institute for Monetary Research.
  30. Troy Davig & Craig Hakkio, 2010. "What is the effect of financial stress on economic activity," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 35-62.
  31. Jie Gan, 2010. "Housing Wealth and Consumption Growth: Evidence from a Large Panel of Households," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2229-2267, June.
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