The Macroeconomic Effects Of Housing Wealth, Housing Finance, And Limited Risk-Sharing In General Equilibrium
Source: New York University
The authors study a two-sector general equilibrium model of housing and non-housing production where heterogeneous households face limited opportunities to insure against aggregate and idiosyncratic risks. The model generates large variability in the national house price-rent ratio, both because it fluctuates endogenously with the state of the economy and because it rises in response to a relaxation of credit constraints and decline in housing transaction costs (financial market liberalization). These factors, together with a rise in foreign ownership of U.S. debt calibrated to match the actual increase over the period 2000-2006, generate an increase in the model price-rent ratio comparable to that observed in U.S. data over this period.