Dorofeenko, Victor (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria) Lee, Gabriel S. (IREBS, University of Regensburg, Regensburg, Germany, and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria) Salyer, Kevin D. (Department of Economics, University of California, Davis, USA)
Abstract
This paper analyzes the role of uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for the business cycle. Also, we demonstrate that bankruptcy costs act as an endogenous markup factor in housing prices; as a consequence, the volatility of housing prices is greater than that of output, as observed in the data. The model can also account for the observed countercyclical behavior of risk premia on loans to the housing sector.
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Publisher Info
Paper provided by Institute for Advanced Studies in its series Economics Series with number
249.
Find related papers by JEL classification: E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment R2 - Urban, Rural, and Regional Economics - - Household Analysis R3 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location