Risk shocks and housing supply: A quantitative analysis

Dorofeenko, Victor and Lee, Gabriel S. and Salyer, Kevin D. (2014) Risk shocks and housing supply: A quantitative analysis. Journal of Economic Dynamics and Control, 45. pp. 194-219.

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Abstract or Table of Contents

This paper analyzes the role of stochastic uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production and provide estimates of the time-series properties of risk shocks by using firm level productivity data. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for understanding housing price movements. Specifically, the model can match the volatility of housing prices observed in the data. It is also demonstrated that adjustment costs are important in replicating the contemporaneous correlation of housing prices with GDP and residential investment. Critically, bankruptcy costs act as an endogenous markup factor in housing prices and are an important determinant of house price volatility. However, in comparison to housing demand shocks, risk shocks have low explanatory power for real quantities. (authors' abstract)

Item Type: Article in Academic Journal
Keywords: Agency costs, Credit channel, Time-varying uncertainty, Residential investment, Housing production, Calibration
Classification Codes (e.g. JEL): E4, E5, E2, R2, R3
Status: Published
Date Deposited: 11 Feb 2015 11:48
Last Modified: 01 Apr 2016 14:17
URI: http://irihs.ihs.ac.at/id/eprint/2997

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