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Housing Market Dynamics: Any News?

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  • Sandra Gomes
  • Caterina Mendicino

Abstract

This paper quantifies the importance of news shocks for housing market fluctuations. To this purpose, we extend Iacoviello and Neri (2010)'s model of the housing market to include news shocks and estimate it using Bayesian methods and U.S. data. We find that news shocks: (1) account for a sizable fraction of the variability in house prices and other macroeconomic variables over the business cycle and (2) significantly contributed to booms and busts episodes in house prices over the last three decades. By linking news shocks to agents' expectations, we find that house price growth was positively related to inflation expectations during the boom of the late 1970's while it was negatively related to interest rate expectations during the housing boom that peaked in the mid-2000's. JEL Classification: C50, E32, E44.

Suggested Citation

  • Sandra Gomes & Caterina Mendicino, 2012. "Housing Market Dynamics: Any News?," Working Papers Department of Economics 2012/23, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
  • Handle: RePEc:ise:isegwp:wp232012
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    Cited by:

    1. Gomes, Sandra & Iskrev, Nikolay & Mendicino, Caterina, 2017. "Monetary policy shocks: We got news!," Journal of Economic Dynamics and Control, Elsevier, vol. 74(C), pages 108-128.
    2. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.
    3. Lambertini, Luisa & Mendicino, Caterina & Teresa Punzi, Maria, 2013. "Leaning against boom–bust cycles in credit and housing prices," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1500-1522.
    4. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2013. "Expectation-driven cycles in the housing market: Evidence from survey data," Journal of Financial Stability, Elsevier, vol. 9(4), pages 518-529.
    5. Fabio Milani, 2012. "The Modeling of Expectations in Empirical DSGE Models: a Survey," Working Papers 121301, University of California-Irvine, Department of Economics.
    6. Virginia Queijo von Heideken & Ferre De Graeve, 2012. "Fiscal policy in contemporary DSGE models," 2012 Meeting Papers 74, Society for Economic Dynamics.
    7. Ng, Eric C.Y. & Feng, Ning, 2016. "Housing market dynamics in a small open economy: Do external and news shocks matter?," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 64-88.

    More about this item

    Keywords

    bayesian estimation; news shocks; local identification; housing market; financial frictions; inflation and interest rate expectations.;

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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