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Housing Market Freezes, Deleveraging, and Aggregate Demand

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  • Christian Bayer

    (Universitaet Bonn)

  • Ralph Luetticke

    (University College London)

Abstract

This paper develops a general equilibrium model of incomplete markets, liquid paper assets and illiquid housing. Housing liquidity fluctuates significantly over time and systematically so over the business cycle. A decrease in the liquidity of housing leads to an increased demand for liquid paper assets and a decrease in demand for houses (as assets). We show that the model generates substantial business cycle effects of fluctuations in housing liquidity on house prices, employment and output, while being in line with relatively small fluctuations in rental rates of housing. We find that low housing liquidity during the Great Recession offers a novel explanation for the sharp decline in interest rates on government bonds.

Suggested Citation

  • Christian Bayer & Ralph Luetticke, 2017. "Housing Market Freezes, Deleveraging, and Aggregate Demand," 2017 Meeting Papers 1069, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1069
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    References listed on IDEAS

    as
    1. Huixin Bi & Eric M. Leeper & Campbell Leith, 2013. "Uncertain Fiscal Consolidations," Economic Journal, Royal Economic Society, vol. 0, pages 31-63, February.
    2. Carroll, Christopher D., 2006. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," Economics Letters, Elsevier, vol. 91(3), pages 312-320, June.
    3. Christian Bayer & Ralph Luetticke & Lien Pham‐Dao & Volker Tjaden, 2019. "Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk," Econometrica, Econometric Society, vol. 87(1), pages 255-290, January.
    4. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins," American Economic Review, American Economic Association, vol. 101(3), pages 471-475, May.
    5. Castaneda, Ana & Diaz-Gimenez, Javier & Rios-Rull, Jose-Victor, 1998. "Exploring the income distribution business cycle dynamics," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 93-130, June.
    Full references (including those not matched with items on IDEAS)

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