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House Prices, Local Demand, and Retail Prices

Listed author(s):
  • Johannes Stroebel
  • Joseph Vavra

We use detailed micro data to document a causal response of local retail prices to changes in local house prices, with elasticities of 15%-20% across housing booms and busts. Notably, these price responses are largest in zip codes with many homeowners, and non-existent in zip codes with mostly renters. We provide evidence that these retail price responses are driven by changes in markups rather than by changes in local costs. We then argue that markups rise with house prices, particularly in high homeownership locations, because greater housing wealth reduces homeowners' demand elasticity, and firms raise markups in response. Consistent with this explanation, shopping data confirms that house price changes affect the price sensitivity of homeowners, but not that of renters. Our evidence suggests a new source of markup variation in business cycle models.

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File URL: http://www.nber.org/papers/w20710.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20710.

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Date of creation: Nov 2014
Handle: RePEc:nbr:nberwo:20710
Note: CF EFG IO LS ME
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