Open Economies Review

, Volume 30, Issue 2, pp 375–402 | Cite as

Expectations and Macro-Housing Interactions in a Small Open Economy: Evidence from Korea

  • Fabio MilaniEmail author
  • Sung Ho Park
Research Article


This paper studies the interaction between the housing sector and the macroeconomic environment in Korea. Besides serving as a typical small open economy, Korea provides an interesting laboratory case, since the country was subject to various housing-cycle phases over the sample, and its policymakers implemented active policies to stabilize the housing market. We present a microfounded open-economy model extended to incorporate a housing sector. The model is estimated using Bayesian methods and a large set of observables. We highlight the role of assumptions about house-price expectations on economic dynamics. In the benchmark case of rational expectations, the spillovers from housing to macro variables are modest. House prices are largely driven by sector-specific demand and supply shocks. Business cycle fluctuations are mostly driven by open-economy shocks. When the assumption of rational expectations is relaxed in favor of extrapolative expectations, however, the impact of the housing sector increases. Macroeconomic spillovers from the housing market become more important, with housing shocks accounting for up to twenty percent of fluctuations in the broader economy.


Housing market-macroeconomy nexus House prices Non-rational expectations Macroprudential policies Household credit Small open economy model Korea’s economy 

JEL Classification

E03 E32 E58 F41 R30 



We would like to thank seminar participants at the Bank of Korea for comments. Professor Milani acknowledges and is grateful for the financial support provided by the Bank of Korea regarding this research project.


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.3151 Social Science Plaza, Department of EconomicsUniversity of CaliforniaIrvineUSA
  2. 2.Bank of KoreaSeoulKorea

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