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Housing and the Business Cycle

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The New Palgrave Dictionary of Economics

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Abstract

Recent events have led to a renewed effort to understand the nature of cyclical fluctuations in the price and quantity of new investment in housing. This paper provides a brief summary of the existing literature modelling housing and the business cycle.

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Notes

  1. 1.

    All data have been logged and HP-Filtered with smoothing parameters λ = 1,600.

  2. 2.

    See McCarthy and Peach (2002) for a recent example.

  3. 3.

    See Cooley and Prescott (1995) for a review.

  4. 4.

    Hansen (1985) shows that when the standard model is adjusted to allow for indivisible labour supply, the standard deviation of hours worked is equal to three-quarters of the standard deviation of GDP.

  5. 5.

    See Benhabib et al. (1991) and Greenwood and Hercowitz (1991) for formal treatments.

  6. 6.

    Gomme and Rupert (2007) argue that the home production model is now the benchmark real business cycle model. Recent and important examples include Fisher (1997), Gomme et al. (2001) and Fisher (2007).

  7. 7.

    A notable exception to this is Hornstein and Praschnik (1997), who study production of durable and non-durable goods.

  8. 8.

    The trend is computed using data from 1975–2002. The trend rate of growth over the entire 1975–2009 period for which we have data is 1.3% per year. Note that 1975 is the starting date for the reliable data series on the price of existing homes – see the notes to Table 1.

  9. 9.

    Additional evidence supporting this claim is in Davis and Ortalo-Magné (2009).

  10. 10.

    See Dorofeenko et al. (2009), Iacoviello and Neri (2010), Kahn (2009) and Kiyotaki et al. (2008), to name just a few recent examples.

  11. 11.

    See the Data Sources Appendix of DH for more details.

  12. 12.

    DH calibrate these shares using data from 1992. The DH specification is inconsistent with the sectoral decline in manufacturing over the post-war period.

  13. 13.

    See the notes to Table 2 for details.

  14. 14.

    Fisher (2007) has made some headway on this issue, but his approach of including home capital as a direct input to market production is not without controversy.

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  1. http://link.springer.com/referencework/10.1057/978-1-349-95189-5

    Morris A. Davis

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  1. Morris A. Davis
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Davis, M.A. (2018). Housing and the Business Cycle. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2929

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