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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. Michael Funke & Michael Paetz, 2012. "A DSGE-based assessment of nonlinear loan-to-Value policies: Evidence from Hong Kong," Quantitative Macroeconomics Working Papers 21204, Hamburg University, Department of Economics.
  2. Iacoviello, Matteo & Minetti, Raoul, 2008. "The credit channel of monetary policy: Evidence from the housing market," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 69-96, March.
  3. Yu-Fu Chen & Michael Funke, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," CESifo Working Paper Series 2759, CESifo Group Munich.
  4. Michael B. Devereux & Philip Lane, 2001. "Exchange Rates and Monetary Policy in Emerging Market Economies," Trinity Economics Papers 200111, Trinity College Dublin, Department of Economics.
  5. Matteo Iacoviello, 2004. "Consumption, House Prices and Collateral Constraints: a Structural Econometric Analysis," 2004 Meeting Papers 201, Society for Economic Dynamics.
  6. 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.
  7. Walentin, Karl & Sellin, Peter, 2010. "Housing collateral and the monetary transmission mechanism," Working Paper Series 239, Sveriges Riksbank (Central Bank of Sweden).
  8. Stefan Gerlach & Wensheng Peng, 2003. "Bank Lending and Property Prices in Hong Kong," Working Papers 122003, Hong Kong Institute for Monetary Research.
  9. Michael Funke & Michael Paetz & Ernest Pytlarczyk, 2010. "Stock market wealth effects in an estimated DSGE model for Hong Kong," Quantitative Macroeconomics Working Papers 21009, Hamburg University, Department of Economics.
  10. Charles I. Jones, 2004. "The Shape of Production Function and the Direction of Technical Change," NBER Working Papers 10457, National Bureau of Economic Research, Inc.
  11. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  12. 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.
  13. Monacelli, Tommaso, 2009. "New Keynesian models, durable goods, and collateral constraints," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 242-254, March.
  14. Calza, Alessandro & Stracca, Livio & Monacelli, Tommaso, 2009. "Housing finance and monetary policy," Working Paper Series 1069, European Central Bank.
  15. 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.
  16. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  17. Margarita Rubio, 2009. "Housing market heterogeneity in a monetary union," Banco de Espa�a Working Papers 0916, Banco de Espa�a.
  18. Nelson, Charles R & Kang, Heejoon, 1979. "Spurious Periodicity in Inappropriately Detrended Time Series," The Warwick Economics Research Paper Series (TWERPS) 161, University of Warwick, Department of Economics.
  19. 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.
  20. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  21. Eric Wong & Tom Fong & Ka-fai Li & Henry Choi, 2011. "Loan-to-Value Ratio as a Macro-Prudential Tool - Hong Kong's Experience and Cross-Country Evidence," Working Papers 1101, Hong Kong Monetary Authority.
  22. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-64, April.
  23. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  24. 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.
  25. 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.
  26. Pau Rabanal & Oriol Aspachs-Bracons, 2011. "The Effects of Housing Prices and Monetary Policy in a Currency Union," IMF Working Papers 11/6, International Monetary Fund.
  27. Ernest Pytlarczyk, 2005. "An Estimated DSGE Model for The German Economy," Computing in Economics and Finance 2005 318, Society for Computational Economics.
  28. 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.
  29. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  30. Eva Ortega & Margarita Rubio & Carlos Thomas, 2011. "House purchase versus rental in Spain," Banco de Espa�a Working Papers 1108, Banco de Espa�a.
  31. 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.
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