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DSGE Reno: Adding a Housing Block to a Small Open Economy Model

Author

Listed:
  • Christopher G Gibbs

    (UNSW Sydney)

  • Jonathan Hambur

    (Reserve Bank of Australia)

  • Gabriela Nodari

    (Reserve Bank of Australia)

Abstract

We propose a straightforward approach to adding a housing sector to a large-scale open economy dynamic stochastic general equilibrium model. The model has four intermediate sectors: non-traded, housing, traded, and resources. Households are assumed to consume housing services as part of their consumption bundle and gain utility from holding housing stock. The utility specification increases households' willingness to hold housing stock and implies a relatively high sensitivity of housing investment to monetary policy. We estimate the model on Australian data and find that our model is better able to match a number of empirical regularities compared to a model without housing. These regularities include the sensitivity of housing investment to interest rates and the persistence of aggregate output's response to monetary policy shocks. We then use the model to explore the role of the housing sector in the rebalancing of the Australian economy following the end of the mining boom. First, we find that most of the recent increase in housing investment has been an endogenous response to the large fall in commodity prices and associated declines in interest rates. Second, the pick-up in housing investment has significantly supported the economy over the past five years, ading a ½ percentage point to GDP growth and a ¼ percentage point to inflation, in year-ended terms.

Suggested Citation

  • Christopher G Gibbs & Jonathan Hambur & Gabriela Nodari, 2018. "DSGE Reno: Adding a Housing Block to a Small Open Economy Model," RBA Research Discussion Papers rdp2018-04, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2018-04
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    File URL: https://www.rba.gov.au/publications/rdp/2018/pdf/rdp2018-04.pdf
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    References listed on IDEAS

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    1. Guay Lim & Sarantis Tsiaplias, 2016. "Non-Linearities in the Relationship between House Prices and Interest Rates: Implications for Monetary Policy," Melbourne Institute Working Paper Series wp2016n02, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    2. 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.
    3. Xianglong Liu & Adrian R. Pagan & Tim Robinson, 2018. "Critically Assessing Estimated DSGE Models: A Case Study of a Multi‐sector Model," The Economic Record, The Economic Society of Australia, vol. 94(307), pages 349-371, December.
    4. Nikola Dvornak & Marion Kohler, 2007. "Housing Wealth, Stock Market Wealth and Consumption: A Panel Analysis for Australia," The Economic Record, The Economic Society of Australia, vol. 83(261), pages 117-130, June.
    5. Ryan Fox & Richard Finlay, 2012. "Dwelling Prices and Household Income," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 13-22, December.
    6. John Muellbauer, 2015. "Housing and the Macroeconomy: Inflation and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 51-58, March.
    7. Christian Gillitzer & Jin Cong Wang, 2015. "Housing Wealth Effects: Cross-sectional Evidence from New Vehicle Registrations," RBA Research Discussion Papers rdp2015-08, Reserve Bank of Australia.
    8. 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 125-164, April.
    9. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    10. Kulish, Mariano & Rees, Daniel, 2011. "The yield curve in a small open economy," Journal of International Economics, Elsevier, vol. 85(2), pages 268-279.
    11. Jarkko P. Jääskelä & Penelope Smith, 2013. "Terms of Trade Shocks: What Are They and What Do They Do?," The Economic Record, The Economic Society of Australia, vol. 89(285), pages 145-159, June.
    12. Manalo, Josef & Perera, Dilhan & Rees, Daniel M., 2015. "Exchange rate movements and the Australian economy," Economic Modelling, Elsevier, vol. 47(C), pages 53-62.
    13. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers 471, Bank of England.
    14. Peter Tulip, 2014. "The Effect of the Mining Boom on the Australian Economy," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 17-22, December.
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    Citations

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    Cited by:

    1. Alexander Ballantyne & Tom Cusbert & Richard Evans & Rochelle Guttmann & Jonathan Hambur & Adam Hamilton & Elizabeth Kendall & Rachael McCririck & Gabriela Nodari & Daniel Rees, 2019. "MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy," RBA Research Discussion Papers rdp2019-07, Reserve Bank of Australia.
    2. David Rodgers & Jonathan Hambur, 2018. "The GFC Investment Tax Break," RBA Research Discussion Papers rdp2018-07, Reserve Bank of Australia.

    More about this item

    Keywords

    housing; DSGE; open economy; monetary policy; residential investment;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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