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Trading Frictions and House Price Dynamics

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  • Andrew Caplin
  • John Leahy

Abstract

We construct a model of trade with matching frictions. The model provides a simple characterization for the joint proces of prices, sales and inventory. We compare the implications of the model to certain properties of housing markets. The model can generate the large price changes and the positive correlation between prices and sales that we see in the data. Unlike the data, prices are negatively autocorrelated and high inventory predicts price appreciation. We investigate several amendments to the model.

Suggested Citation

  • Andrew Caplin & John Leahy, 2008. "Trading Frictions and House Price Dynamics," NBER Working Papers 14605, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14605
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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