The Journal of Real Estate Finance and Economics

, Volume 48, Issue 2, pp 323–341 | Cite as

Why the Housing Sector Leads the Whole Economy: The Importance of Collateral Constraints and News Shocks

  • Yu Ren
  • Yufei Yuan


This paper establishes a dynamic stochastic partial equilibrium model for explaining residential investment dynamics in the United States, focusing on the distinctive cyclical features of residential investment in that it leads the whole economy. This paper is different from the existing literature by adding three new features to the model: news shocks, collateral constraints and agent heterogeneity. The partial equilibrium analysis where interest rates are exogenously fixed shows that these assumptions are essential to generating the dynamic pattern in which residential investment leads consumption and GDP.


News shocks Heterogeneous agents Housing sector Collateral constraints Aggregate uncertainty 



Ren’s research is partially supported by the Natural Science Foundation of Fujian Province of China (No. 2011J01384) and the Natural Science Foundation of China (# 71131008 and # 70971113). Yuan’s reserach is supported by the Natural Science Foundation of China (# 71203189). We are particularly indebted to Paul Klein, Karen Kopecky and John Whalley for their comments. We are also grateful to Jim MacGee, Elizabeth Caucutt, Hiroyuki Kasahara, James Davies, John Tsoukalas, Yi Wen , Xiaodong Zhu and Ying Shang.


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© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.WISE, MOE Key Laboratory of Econometrics, Fujian Key Laboratory of Statistical SciencesXiamen UniversityXiamenPeople’s Republic of China

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