Homework in Monetary Economics: Inflation, Home Production, and the Production of Homes

S. Boragan Aruoba, Morris A. Davis, Randall Wright

NBER Working Paper No. 18276
Issued in August 2012
NBER Program(s):   EFG

We study models incorporating money, household production, and investment in housing. Inflation, as a tax on market activity, encourages substitution into household production, and thus investment in household capital. Hence, inflation increases the (appropriately deflated) value of the housing stock. This is documented in various data sources. A calibrated model accounts for a fifth to a half of the observed relationships. While this leaves much to be explained, it demonstrates the channel is economically relevant. We also show models with home production imply higher costs of inflation than models without it, especially when home and market goods are close substitutes.

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Document Object Identifier (DOI): 10.3386/w18276

Published: Review of Economic Dynamics Available online 25 November 2014 In Press, Corrected Proof — Note to users Cover image Homework in monetary economics: Inflation, home production, and the production of homes ☆ S. Borağan Aruobaa, , , Morris A. Davisb, Randall Wrightc, d, e, f

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