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Housing and Liquidity

  • Yu Zhu

    (University of Wisconsin - Madison)

  • Randall Wright

    (University of Wisconsin)

  • Chao He

    (Renmin University of China)

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Housing, in addition to providing direct utility, facilitates credit transactions when home equity serves as collateral. We document big increases in home-equity loans coinciding with the start of the house-price boom, and suggest an explanation. When it is used as collateral, housing can bear a liquidity premium. Since liquidity is endogenous, even when fundamentals are deterministic and time invariant equilibrium house prices can display complicated patterns -- including cyclic, chaotic and stochastic trajectories -- some of which resemble bubbles. Our framework is tractable, with exogenous or with endogenous supply, and with exogenous or endogenous credit limits. Yet it captures several salient qualitative features of actual housing markets. Numerical work shows the model can also capture some, if not all, quantitative features, as well. The effects of monetary policy are also discussed.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 168.

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Date of creation: 2013
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Handle: RePEc:red:sed013:168
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