winners and losers in housing markets this paper is a quantitatively oriented theoretical study into the interaction between housing prices aggregate production and household behaviour over a lifetime we develop a life cycle model of a production economy in which land and capital are used to build residential and commercial structures we find that in an economy where the share of land in the value of structures is large housing prices react more to an exogenous change in expected productivity or the world interest rate causing large redistribution effects between net buyers and net sellers of houses changing the financing constraint however has limited effects on housing prices

banking in computable general equilibrium economies abstract in this paper we develop a computable general equilibrium economy that models the banking sector explicitly banks intermediate between households and between the household sector and the government sector households borrow from banks to finance their purchases of houses and they lend to banks to save for retirement banks pool households savings and they purchase interest bearing government debt and non interest bearing reserves we use this structure to answer two sets of questions one normative in nature that evaluates the welfare costs of alternative monetary and tax policies and one positive in nature that studies the real effects of following a procyclical interest rate policy rule

residential segregation the role of inequality and housing subsidies abstract residential segregation is a key public policy issue that is driven by economic factors on the one side and individual attitudes towards ethnic diversity on the other side we assume a modeling framework that consists of a population of two ethnic groups a rental market for each neighborhood and household s utility which depends on consumption and housing accounting for income disparities and heterogeneous preferences for living in ethnically diverse neighborhoods we examine the residential segregation patterns that occur when households make their neighborhood choice by taking economic and diversity related aspects into account the investigation reveals that ethnic income disparities and heterogeneous preferences are antagonistic forces such that a certain level of income stratification is the price for residential integration in light of these findings we discuss to which extent and under which conditions housing subsidy policies can favor residential integration

credit supply and the housing boom an increase in credit supply driven by looser lending constraints in the mortgage market is the key force behind four empirical features of the housing boom before the great recession the unpreced

housing portfolio choice and the macroeconomy abstract this paper investigates the properties of the wealth distribution and the portfolio composition regarding housing and equity holdings and their relationship to macroeconomic shocks to this end i construct a business cycle model in which agents differ in age income and wealth housing provides shelter services and serves as collateral for loans the model is consistent with several facts such as the life cycle pattern of housing to wealth ratios the larger degree of concentration for non housing wealth the smaller weight of housing in richer households portfolios as well as the larger housing to wealth ratios in recessions in addition the model shows that while relaxing the collateral constraint does not impact the business cycle dynamics for the entire economy it significantly alters the behavior of residential and business investment for the younger and poorer fraction of the population

nonlinear effects of mortgage spreads over the business cycle this paper provides robust evidence for the nonlinear effects of mortgage spread shocks during recessions and expansions in the united states estimating a smooth transition vector autoregression stvar model we show that mortgage spread shocks hitting in a recessionary phase create significantly deeper and more protracted declines in consumption and housing market variables in addition we provide evidence that these mortgage spread shocks could be largely interpreted as credit supply shocks in the mortgage market our empirical results imply that unconventional monetary policy such as the federal reserve s mortgage backed security purchase program would be a more effective tool for stabilizing the economy during recessions than in expansions

the equilibrium effect of fundamentals on house prices and rents abstract using a dynamic equilibrium model of housing tenure choice with fully specified markets for homeownership and rental properties and endogenous house prices and rents this paper studies the effect of fundamentals on equilibrium house prices and rents lower interest rates relaxed lending standards and higher incomes are shown to account for approximately one half of the increase in the u s house price rent ratio between 1995 and 2006 and to generate the pattern of rapidly growing house prices sluggish rents increasing homeownership and rising household indebtedness observed in the data

interruptible electric power service contracts abstract a two period model is considered in period 1 the electric power company offers for sale a set of contracts 1 p 1 2 p 2 each consumer must select one contract k and d units of energy for which she pays p k d the company must deliver d units of energy in period 2 with probability k the service may be interrupted with the complementary probability 1 k the problem is to design the optimal set of contracts to maximize social welfare when demand and supply may be random and when customers suffer a welfare loss due to service interruption the best design is shown to be a solution to an optimal control problem the results contrast sharply with previous work on the problem of pricing electric power in the face of random supply or demand

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

the impact of supply constraints on house prices in england we test the theoretical prediction that house prices respond more strongly to changes in local earnings in places with tight supply constraints using a unique panel dataset of 353 local planning authorities in england between 1974 and 2008 exploiting exogenous variation from a policy reform vote shares and historical density to identify the endogenous constraints measures we find that regulatory constraints have a substantive positive impact on the house price earnings elasticity the effect of constraints due to scarcity of developable land is largely confined to highly urbanised areas and uneven topography has a quantitatively less meaningful impact

the wealth distribution with durable goods in the united states the distribution of houses is less egalitarian than that of earnings for the total population but these two distributions are remarkably similar for homeowners additionally housing as a fraction of total wealth decreases with the level of wealth in order to understand the different factors that account for these wealth composition patterns we introduce illiquid houses and collateral credit in a general equilibrium model of heterogeneous agents with idiosyncratic uncertainty a combination of very persistent shocks to earnings frictions in the housing market and a rental market is necessary to obtain numbers in line with the evidence

housing demand during the boom the role of expectations and credit constraints i use a life cycle model of housing demand to infer expectations about house prices and home equity requirements for the housing boom of the 2000s from observed household choices expectations and credit constraints are separately identified from the intensive and extensive margins of housing demand the main results are that 1 expected price growth was close to average long run growth 2 home equity requirements were lax initially but tightened after the bust and 3 subjective uncertainty about future price growth was large given the option to default on mortgage debt greater price uncertainty leads to higher optimal household leverage

macroeconomic adjustment under loose financing conditions in the construction sector abstract we provide a model with sector specific debt collateral constraints to analyze how asymmetric financing conditions across sectors affect the aggregate investment credit and output composition in our model investments in the construction sector allow for higher leverage than investments in the non durable consumption goods sector when borrowing constraints bind in both sectors unit returns in the construction sector are lower due to a positive pledgeability premium and changes in interest rates have a non monotonic effect in the sectoral composition of investment specifically a fall in interest rates triggers a relative rise in investment in the consumption goods sector when rates are relatively high whereas the opposite effect obtains when rates are sufficiently low we argue that this prediction of the model which depends critically on the asymmetries of financing conditions across sectors is consistent with the evidence for a number of oecd countries during the decade before the 2007 2008 crisis

financial innovation the discovery of risk and the u s credit crisis abstract financial innovation and overconfidence about the risk of new financial products were key factors behind the 2008 u s credit crisis we show that a model with a collateral constraint in which learning about the risk of a new financial environment interacts with fisherian amplification produces a boom bust cycle in debt asset prices and consumption early realizations of a high borrowing ability regime turn agents optimistic about the persistence probability of this regime conversely the first realization of a low borrowing ability regime turns agents unduly pessimistic the model predicts large increases in household debt land prices and excess returns during 1998 2006 followed by a collapse

renting vs buying a home a matter of wealth accumulation or of geographic stability abstract i study the housing tenure decision in the context of a spatial life cycle model with uninsurable individual income risk plausibly calibrated to match key features of the us housing market i find that the relatively low ownership rate of young households is mainly explained by their high geographic mobility downpayment constraints have minor quantitative implications on ownership rates except for old households i also find that idiosyncratic earnings uncertainty has a significant impact on homeownership rates based on these results i argue that the long term increase in ownership rates observed over the period 1993 2009 was not necessarily due to mortgage market innovations and the relaxation of downpayment requirements as is often argued instead it was simply an implication of us demographic evolution most notably the decline in interstate migration and less importantly population ageing the model predicts that an increase in the income risk i e higher income inequality has a positive impact on geographical mobility of young households which means that young homeowners are less affected by the labour market inefficiency associated with homeownership

supply management with intermittent trade disruptions when the probabilities are not fully known abstract previous studies of trade disruptions have assumed that the probabilistic transition rates between normal and disrupted markets are known this may be unreasonable if disruptions occur infrequently in this paper a bayesian procedure for estimating the transition rates is derived under the assumption that the transition processes are exogenous and poisson the procedure is applied to the problem of managing emergency reserves in an import dependent economy time consistent plans for consuming and replenishing reserves are derived optimal reserves are found to be generally larger than if the transition rates were known and equal to current expected values

mortgage debt consumption and illiquid housing markets in the great recession using a model with housing search endogenous credit constraints and mortgage default this paper accounts for the housing crash from 2006 to 2011 and its implications for aggregate and cross sectional consumption during the great recession left tail shocks to labor market uncertainty and tighter down payment requirements emerge as the key drivers an endogenous decline in housing liquidity amplifies the recession by increasing foreclosures contracting credit and depressing consumption balance sheets act as a transmission mechanism from housing to consumption that depends on gross portfolio positions and the leverage distribution low interest rate policies accelerate the recovery in housing and consumption

offshoring tasks and the skill wage pattern the paper investigates the relationship between offshoring wages and the occupational task profile using rich individual level panel data our main results suggest that when only considering within industry changes in offshoring we identify a moderate wage reduction due to offshoring for low skilled workers though wage effects in relation to the task profile of occupations are not estimated with sufficient precision however when allowing for cross industry effects of offshoring i e allowing for labor mobility across industries negative wage effects of offshoring are quite substantial and depend strongly on the task profile of workers occupations a higher degree of interactivity and in particular non routine content effectively shields workers against the negative wage impact of offshoring

cross sectional patterns of mortgage debt during the housing boom evidence and implications the reallocation of mortgage debt to low income or marginally qualified borrowers plays a central role in many explanations of the early 2000s housing boom we show that such a reallocation never occurred as the distribution of mortgage debt with respect to income changed little even as the aggregate stock of debt grew rapidly moreover because mortgage debt varies positively with income in the cross section equal percentage increases in debt among high and low income borrowers meant that wealthy borrowers accounted for most new debt in dollar terms previous research stressing the importance of low income borrowing was based on the inflow of new mortgage originations alone so it could not detect offsetting outflows in mortgage terminations that left the allocation of debt stable over time and while defaults on subprime mortgages played an important part in the financial crisis the data show that subprime lending did not cause a reallocation of debt toward the poor rather subprime lending prevented a reallocation of debt toward the wealthy

government intervention in the housing market who wins who loses abstract many u s government policies aim to encourage homeownership we use a general equilibrium model with heterogeneous agents to consider the effects of temporary homebuyer tax credits and the asymmetric tax treatment of owner occupied and rental housing on prices quantities allocations and welfare the model suggests that homebuyer tax credits temporarily raise house prices and transaction volumes but have negative effects on welfare removing the asymmetric tax treatment of owner occupied and rental housing can generate welfare gains for a majority of agents across steady states but welfare impacts are substantially more varied along the transitions between steady states

accounting for the u s earnings and wealth inequality we show that a theory of earnings and wealth inequality based on the optimal choices of ex ante identical households that face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the u s earnings and wealth inequality almost exactly

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

capital over the business cycle renting versus ownership we find that capital renting makes up one fifth of u s capital expenditures and it increases during downturns further we present cross country evidence that output losses after financial crises are smaller where renting is more prevalent to understand these findings we build a general equilibrium model with borrowing constraints and with the option to rent or buy capital the countercyclicality of rentals occurs because their supply increases as renting serves as an additional means of savings when credit markets malfunction moreover demand also shifts toward rentals as they become relatively cheaper by absorbing excess savings renting mitigates financial crises

booms and busts consumption house prices and expectations over much of the past 25 years house price and consumption growth have been closely synchronized three main hypotheses for this have been proposed increases in house prices raise household wealth and so their consumption house price growth reduces credit constraints by increasing the collateral available to homeowners and house prices and consumption are together influenced by common factors using microeconomic data we find that the relationship between house prices and consumption is stronger for younger than older households contradicting the wealth channel we suggest that common causality has been the most important factor linking house prices and consumption

do house prices affect consumption a re assessment of the wealth hypothesis this paper revives the debate in the literature about the relationship between house prices and consumption by exploring conflicting results in the uk campbell and cocco 2007 find that old owners benefit most from a house price increase and young renters least confirming the so called wealth hypothesis in contrast attanasio et al 2009 find that house prices have the same impact on consumption across age groups we rule out several potential explanations related to data construction and provide evidence that the functional form can reconcile the conflicting results in the two papers

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

housing taxation and capital accumulation this paper studies the impact of the preferential tax treatment of housing capital in a dynamic general equilibrium life cycle economy populated by heterogeneous individuals the model includes the main housing tax provisions currently in place in the u s and a minimum downpayment requirement upon purchasing non divisible houses the tax code makes the return on housing capital larger than that on business capital which distorts the lifetime profile and composition of individuals savings the wedge between the two rates of return emanates from the failure to tax imputed rents and is amplified by the presence of mortgage interest deductibility simulations show that individuals at all income levels would rather live in a world where imputed rents are taxed or one where mortgage interest payments are not deductible furthermore distributional effects are much smaller than conventionally believed

discount shock price rent dynamics and the business cycle the price rent ratio is highly volatile and predicts future returns for commercial real estate price rent variations in commercial real estate also tend to comove with investment and output we develop a general equilibrium model that explicitly introduces a rental market and incorporates collateral constraints on production as a key ingredient our estimation identifies discount rate shocks as the most important factor in 1 driving price rent variations 2 producing the long horizon predictability of real estate returns and 3 linking the dynamics in commercial real estate to those in the production sector

housing over time and over the life cycle a structural estimation we estimate a structural model of optimal life cycle housing and nonhousing con sumption in the presence of labor income and house price uncertainties the model postulates constant elasticity of substitution between housing service and nonhousing consumption and explicitly incorporates a housing adjustment cost our estimationts the cross sectional and time series household wealth and housing proles from the panel study of income dynamics 1984 to 2005 reasonably well and suggests an intratemporal elasticity of substitution between housing and nonhousing consumption of 0 487 the low elasticity estimate is largely driven by moments conditional on state house prices and moments in the latter half of the sample period and is robust to different assumptions of housing adjustment cost we then conduct policy analyses in which we let house price and income take values as those observed between 2006 and 2011 we show that the responses depend importantly on the housing adjustment cost and the elasticity of sub stitution between housing and nonhousing consumption in particular compared with the benchmark the impact of the shocks on homeownership rates is reduced but the impact on nonhousing consumption is magnied when the house selling cost is sizable or when housing service and nonhousing consumption are highly substitutable

humps and bumps in lifetime consumption in this article we argue that the life cycle model that allows demographics to affect household preferences and relaxes the assumption of certainty equivalence can generate hump shaped consumption profiles over age that are very similar to those observed in household level data sources and in particular match the differences in shape across different education groups liquidity constraints or myopia are not required to explain the empirical features of observed life cycle patterns

housing decision with divorce risk we build a realistically calibrated life cycle model of housing decisions under divorce risk as observed in the data our model predicts the recent increase in divorce rates leads to reduced homeownership rates the event of a divorce negatively affects homeownership and this effect is long lasting the risk of a divorce triggers a precautionary savings motive however this motive is weaker when individuals can invest in owner occupied homes because homeowners higher savings partially substitute for precautionary savings when young the larger asset accumulation due to divorce risk induced precautionary savings enables households to buy homes earlier whereas the presence of transaction costs leads to reduced homeownership for middle aged and older households when divorce risk goes up

cyprus from boom to bail in this is a case study of how a country nearly reached bankruptcy in march 2013 within five years of entering the eurozone the magnitude of the requested assistance is extremely large relative to gdp 100 and studying this event provides useful lessons for avoiding such crises in the future the crisis resulted from a worsening european economic environment especially in greece bad choices with regards to public finances weak corporate governance within the local banking sector inadequate and or difficult regulation of cross border banking worsening competitiveness and bad political decisions at the european and especially the local cypriot level local politics reflected in short term political calculations and or inadequate understanding of the magnitude of the crisis delayed corrective action for 18 months until election time making a bad situation almost impossible to deal with overconfidence can be one behavioural explanation for why local politicians ignored the dramatic costs of inaction alexander michaelides

a simpler theory of optimal capital taxation abstract this paper develops a theory of optimal capital taxation that expresses optimal tax formulas in sufficient statistics we first consider a simple model with utility functions linear in consumption and featuring heterogeneous utility for wealth in this case there are no transitional dynamics the steady state is reached immediately and has finite elasticities of capital with respect to the net of tax rate this allows for a tractable optimal tax analysis with formulas expressed in terms of empirical elasticities and social preferences that can address many important policy questions these formulas can easily be taken to the data to simulate optimal taxes which we do using u s tax return data on labor and capital incomes second we show how these results can be extended to the case with concave utility for consumption the same types of formulas carry over by appropriately defining elasticities we show that one can recover all the results from the simpler model using a new and non standard steady state approach that respects individual preferences even with a fully general utility function

a dynamic model of housing demand estimation and policy implications a dynamic model of housing demand using data from the panel study of income dynamics psid we specify estimate and simulate a dynamic structural model of housing demand our model generalizes previous applied econometric work by incorporating realistic features of the housing market including non convex adjustment costs from buying and selling a home credit constraints from minimum downpayment requirements and uncertainty about the evolution of incomes and home prices we argue that these features are critical for capturing salient features of housing demand observed in the psid after estimating the model we use it to simulate how consumer behavior responds to house price and income declines as well as tightening credit these experiments are motivated by the u s recession starting in december of 2007 that saw large falls in home prices large negative income shocks for many households and tightening credit standards in the short run relatively few households adjust their housing stock households respond instead by reducing non housing consumption and reducing wealth because they wish to avoid losing their home and the associated adjustment costs households that adjust in the short run are those hit with a series of bad shocks such as a negative income shock and a home price decline a larger proportion of households do adjust their consumption in the long run increasing their housing stock since housing is less expensive however such changes may occur several years after the shocks listed above

optimal fiscal policy in the neoclassical growth model revisited this paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period thereby making the supply of capital elastic in the short run because taxing capital is distortionary in the short run the government s ability desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed our timing assumption also leads to a tractable ramsey problem without state contingent debt which can give rise to debt financed budget deficits during recessions

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

phasing out the gses we develop a new model of the mortgage market where both borrowers and lenders can default risk tolerant savers act as intermediaries between risk averse depositors and impatient borrowers the government plays a crucial role by providing both mortgage guarantees and deposit insurance underpriced government mortgage guarantees lead to more and riskier mortgage originations as well as to high financial sector leverage mortgage crises occasionally turn into financial crises and government bailouts due to the fragility of the intermediaries balance sheets increasing the price of the mortgage guarantee crowds in the private sector reduces financial fragility leads to fewer but safer mortgages lowers house prices and raises mortgage and risk free interest rates due to a more robust financial sector consumption smoothing improves and aggregate welfare increases while borrowers are nearly indifferent to a world with or without mortgage guarantees savers are substantially better off while aggregate welfare increases so does wealth inequality jel g12 g15 f31

consumption and time use over the life cycle we incorporate home production in a dynamic general equilibrium model of consumption and savings with illiquid housing and a collateralized borrowing constraint the calibrated model explains life cycle patterns of households time use and consumption of different categories documented from the microdata it predicts that the interaction of the labor efficiency profile and the home production technology explains households time use the resulting income profiles the endogenous borrowing constraint and home production account for the initial hump in consumption the complementarity of home hours home input and housing in home production drives the consumption profiles later in the life cycle

leverage and the foreclosure crisis how much of the foreclosure crisis can be explained by the large number of high leverage mortgages originated during the housing boom in our model heterogeneous households select from mortgages with different down payments and choose whether to default given income and housing shocks the use of low down payment loans is initially limited by payment to income requirements but becomes unrestricted during the boom the model approximates key housing and mortgage market facts before and after the crisis a counterfactual experiment suggests that the increased number of high leverage loans originated prior to the crisis can explain over 60 percent of the rise in foreclosure rates

consumption over the life cycle facts from consumer expenditure survey data this paper uses consumer expenditure survey data and a seminonparametric statistical model to estimate life cycle profiles of consumption controlling for demographics cohort and time effects we construct age profiles for total and nondurable consumption as well as expenditure patterns for consumer durables special emphasis is placed on the comparison of different approaches to control for changes in demo graphics over the life cycle we find significant humps over the life cycle for total nondurable and durable expenditures changes in household size account for roughly half of these humps bootstrap simulations suggest that our empirical estimates are tight in that standard errors are small

who marries whom in a surging housing market abstract this paper investigates the impact of a surging housing market on marital sorting our empirical analysis shows that there is increasing assortativeness on original family background in response to housing price appreciation that is for husbands when the down payment doubles one more year of paternal schooling predicts a marriage in which the father in law s schooling is 0 057 year greater than in a scenario in which the down payment does not increase the rising assortativeness could exacerbate the already expanding inequality caused by the booming housing market in addition to the benchmark analysis we find that a divorce reform which awards assets proportionate to the shares the spouses paid for the initial down payment rather than awarding equal shares upon divorce alleviates assortativeness the evidence suggests that joint investment in housing is likely to be a significant consideration in marital sorting

transition to the property tax in china a dynamic general equilibrium analysis abstract we use the dynamic general equilibrium approach to examine the potential impacts of the introduction of alternative tax regimes in the housing market in china this approach models housing demand and supply based on the dynamic optimization behaviors of households and a representative housing developer the model is able to capture key features in the chinese housing market and it provides predictions about policy effects through counterfactual experiments we consider a universal property tax a selective tax that applies to investment properties only and a land value tax regarding the use of tax revenue we examine two alternatives 1 a redistributive scenario where tax revenue is redistributed in equal amounts to households and 2 a non redistributive scenario where tax revenue is spent on local public goods without affecting household decisions quantitatively we find that the selective and re distributive tax is more efficient in terms of generating sustainable government revenues and reducing vacancy rates

houses as atms mortgage refinancing and macroeconomic uncertainty we estimate a structural model of household liquidity management in the presence of long term mortgages households face counter cyclical idiosyncratic labor income uncertainty and borrowing constraints which aect optimal choices of leverage precautionary saving in liquid assets and illiquid home equity debt repayment mortgage renancing and default taking the observed historical path of house prices aggregate

joint dynamics of house prices and foreclosures this paper studies the joint transitional dynamics of the foreclosures and house prices in a standard life cycle incomplete markets model with housing and a realistic long term mortgage structure we calibrate our model to match several long term features of the u s housing market and analyze the effects of several unexpected and permanent shocks on the house price and the foreclosure rate both across the steady states and along the transition between the steady states we examine permanent unexpected shocks to the risk free interest rate the minimum down payment ratio and unemployment during the transition these shocks create large movements in house prices more importantly the foreclosure dynamics are quite significant along the transition compared to the steady state changes and there are strong feedbacks between foreclosures and house prices we assess the effects of a temporary reduction in the risk free interest rate which has moderate effects on house prices but little effect on foreclosure dynamics we also study the effects of an ex ante macroprudential policy which establishes a minimum down payment requirement at a higher threshold such a macroprudential policy helps substantially stabilize both house prices and foreclosures

efficient allocations with hidden income and hidden storage we consider an environment in which individuals receive income shocks that are unobservable to others and can privately store resources we provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or alternatively in which the worst possible outcome is sufficiently dire we show that unlike in environments without unobservable storage the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade riskfree bonds among themselves in this paper we consider an environment in which individuals have random income and can accumulate assets through a storage technology their income realizations and their asset position are private information given these informational frictions we provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or alternatively in which the worst possible outcome is sufficiently dire we show that the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade risk free bonds among themselves there is a large prior literature which examines the characteristics of efficient risksharing in dynamic settings in the presence of private information unlike our paper this literature generally finds that efficient allocations do not coincide with the equilibrium allocations of any economy with a competitive bond market see atkeson and lucas 1992 in particular the key difference between our paper and these preceding ones is that the earlier literature assumes either that agents cannot accumulate resources over time or that if they can this accumulation is observable in contrast we assume that both agents incomes and their stored resources are private information it is this combination of assumptions that leads to our result our findings are reminiscent of allen s 1985 he considers a dynamic principalagent relationship in which the agent is risk averse and has hidden stochastic income the

spatial asset pricing a first step people choose where to live and how much to invest in housing traditionally the first decision has been the domain of spatial economics while the second has been analyzed in finance spatial asset pricing is an attempt to combine equilibrium concepts from both disciplines in the finance context we show how spatial decisions can be framed as an expanded portfolio problem within spatial economics we identify the consequences of hedging motives for location decisions we characterize a number of observable deviations from standard predictions in finance e g the definition of the relevant market portfolio for the pricing of risk includes homeownership rates and in spatial economics e g hedging considerations and the pricing of risk affect the geographic allocation of human capital

embargo threats and the management of emergency reserves this paper develops a model of a country that can import oil in normal times but is subject to random trade disruptions to mitigate the effects of these disruptions some of the imported oil is stockpiled there are two kinds of uncertainty involved the date at which an embargo will be imposed is not known in advance and given that an embargo has been imposed the date at which it will end is uncertain optimal behavior is analyzed by means of dynamic programming 13 references

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

the welfare effects of intermittent interruptions of trade consider the problem of a buyer purchasing a costlessly storable good at a fixed price under threat of interruption of trade suppose there are two distinct and exhaustive regimes either one can buy as much as desired at the going price or one can purchase nothing at all and must rely on accumulated stocks for consumption the market moves randomly over time between these two states which will be referred to here as on and off respectively given the stochastic process governing the evolution of market regimes the price faced when the market is on and the intertemporal preferences of the buyer one may inquire as to the optimal acquisition rate for storage and consumption when the market is on and the optimal usage of accumulated stocks when the market is off solutions for these problems could then be used to ascertain the degree to which buyer and seller welfare is affected by the probabilistic curtailment of trading opportunities and the willingness to pay of the buyer for greater security of supply as well the possibility of inferring from purchase and storage behavior the buyer s perception of the likelihood and duration of trade interruptions may be explored this paper presents a general solution to this problem for stationary environments that is assuming intertemporal preferences to be representable by the expected present value of a uniformly discounted time independent flow utility function and taking the stochastic process governing change in regimes to be stationary markov optimal behavior and associated expected discounted utility are derived the method employed adapts to this context the dynamic programming arguments of my 1981 paper and is similar in structure to that employed in the analysis of resource depletion with technological uncertainty in partha dasgupta and geoffrey heal 1974 and dasgupta and joseph stiglitz 1981 there are many industrial markets in which these considerations are important recent events in the world oil market have stimulated much interest in the study of strategic mineral reserves see for example thomas teisberg 1981 in markets where demand fluctuates randomly and prices are inflexible for example the industrial market for natural gas the possibility of stochastic rationing has important implications for firm behavior see dennis carleton 1978 the prospect of strike upstream or lag in the delivery of goods on order has significant implications for inventory holdings in some industries the framework of this paper may even be adapted to the study of labor supply and savings behavior over the life cycle for a worker facing intermittent and uncertain unemployment

housing price and fundamentals in a transition economy the case of the beijing market this article develops a dynamic rational expectations general equilibrium framework that links house value to fundamental economic variables such as income growth demographics migration and land supply our framework handles nonstationary dynamics as well as structural changes in fundamentals that are commonplace in transition economies applying the framework to beijing we find that the equilibrium house price and rent under reasonable parameterizations of the model are substantially lower than the data we explore potential explanations for the discrepancies between the model and the data

home is where the equity is mortgage refinancing and household consumption applying a permanent income model with exogenous liquidity constraints and mortgage behavior household refinancing when mortgage interest rates are historically high and rising a persistent empirical puzzle is explained using data from the panel study of income dynamics households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25 more likely to refinance 1991 94 on average such liquidity constrained households converted over two thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted 1991 94 producing an estimated expenditure stimulus of at least 28 billion

infrequent housing adjustment limited participation and monetary policy this paper asks why monetary contractions have strong effects on the housing market the paper presents a model with staggered housing adjustment in which monetary policy has real effects in the absence of any rigidity in producer pricing or wages limited participation in financial markets leads to a rise in the real mortgage rate following an increase in the nominal short rate since households must take on a mortgage to consume housing the rise in the real interest rate reduces the share of residential investment in output

systematic monetary policy and the macroeconomic effects of shifts in residential loan to value ratios what are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets as measured by loan to value ltv ratios using a structural vector autoregression var we find that gdp and business investment increase following an expansionary ltv shock residential investment by contrast falls after a small initial uptick a result that depends on the systematic reaction of monetary policy we show that historically the fed tended to respond to expansionary ltv shocks by raising the monetary policy instrument and as a result mortgage rates increased and residential investment declined house prices are affected in a similar manner