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Beliefs, Aggregate Risk, and the U.S. Housing Boom

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  • Margaret Jacobson

    (Indiana University)

Abstract

This paper investigates the quantitative importance of the interaction of beliefs with credit conditions in explaining the run-up of house prices during the U.S. housing boom. To allow for interacting beliefs and credit conditions while maintaining computational tractability, I will introduce adaptive expectations into a general equilibrium life-cycle model with aggregate risk, incomplete markets, and defaultable debt. I will compare results from the model solved under adaptive expectations derived from ZIP code level house price data to results solved under rational expectations. Although house prices grew by 40 percent relative to their pre-boom level in the data, positive income shocks only generate a 5 percent increase in house prices under rational expectations in the model.

Suggested Citation

  • Margaret Jacobson, 2019. "Beliefs, Aggregate Risk, and the U.S. Housing Boom," 2019 Meeting Papers 1549, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:1549
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    Cited by:

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    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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