NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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A Theory of Housing Demand Shocks

Zheng Liu, Pengfei Wang, Tao Zha

NBER Working Paper No. 25667
Issued in March 2019
NBER Program(s):Asset Pricing Program, Economic Fluctuations and Growth Program, Monetary Economics Program

Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.

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Document Object Identifier (DOI): 10.3386/w25667

 
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