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House Prices and Government Spending Shocks
Author(s) -
KHAN HASHMAT,
REZA ABEER
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.12416
Subject(s) - dynamic stochastic general equilibrium , economics , government spending , government (linguistics) , value (mathematics) , monetary economics , collateralized debt obligation , house price , demand shock , shadow (psychology) , macroeconomics , econometrics , keynesian economics , monetary policy , finance , welfare , market economy , psychology , linguistics , philosophy , collateral , machine learning , computer science , psychotherapist
We show that dynamic stochastic general equilibrium (DSGE) models with housing and collateralized borrowing predict a fall in house prices following positive government spending shocks. By contrast, we show that house prices in the United States rise persistently after identified positive government spending shocks. We clarify that the incorrect house price response is due to a general property of DSGE models—approximately constant shadow value of housing—and that modifying preferences and production structure cannot help in obtaining the correct house price response. Properly accounting for the empirical evidence on government spending shocks and house prices using a DSGE model therefore remains a significant challenge.