- Why The House Sector Leads The Whole Economy: the Importance of Collateral Constraints and News Shocks
- Yu Ren, Yufei Yuan
- #002030 20131014 (published)
- 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 in that it adds 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 the Gross Domestic Product (GDP).
- JEL-Codes: E25, E21, E32
- Keywords: news shocks, heterogeneous agents, house sector, collateral constraints, aggregate uncertainty
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