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What Drives the Owner‐Occupied and Rental Housing Markets? Evidence from an Estimated DSGE Model
Author(s) -
SUN XIAOJIN,
TSANG KWOK PING
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12385
Subject(s) - dynamic stochastic general equilibrium , economic rent , economics , renting , business cycle , econometrics , shock (circulatory) , investment (military) , real estate , microeconomics , monetary economics , macroeconomics , monetary policy , finance , medicine , politics , political science , law
Most dynamic stochastic general equilibrium (DSGE) models with a housing market do not explicitly include a rental market and assume a tight mapping between house prices and rents over the business cycle. However, rents are much smoother than house prices in the data. We match this feature of the data by adding both an owner‐occupied housing market and a rental market in a standard DSGE model. The intertemporal preference shock accounts for more than half of the variation in house prices and contributes to residential investment fluctuations through the liquidity constraint, and nominal rigidity in rental contracts captures the variation in the price‐rent ratio.