The dynamics of house prices, sales, construction, and population growth in response to city-specific income shocks are characterized for 106 US cities. A dynamic model of search in the housing market in which construction, the entry of buyers, house prices, and sales are determined in equilibrium is then developed. The theory generates dynamics qualitatively consistent with the observations and a version calibrated to match key features of the US housing market offers a substantial quantitative improvement over models without search. In particular, variation in the time it takes to sell induces transaction prices to exhibit serially correlated growth. (JEL D83, R21, R23, R31)We explore the consequences of time-consuming search and matching for the dynamics of house prices, sales, and construction at the city level. First, we characterize the impact of city-specific income shocks on the short-run dynamics of average house prices, home sales, construction, and population growth for a panel of US cities. We then develop a model in which the entry of new buyers and the construction of new houses in response to such shocks are endogenously determined. Our theory generates serial correlation in the growth rates of house prices and construction, even if income is strictly mean-reverting following shocks. 1 When calibrated to data on US cities our model accounts for over 80 percent of the variance of house price movements driven by city-specific income shocks and nearly half of the observed autocorrelation of house price growth.In our empirical analysis, we estimate a structural panel vector autoregressive (VAR) model using city-level observations on the variables listed above. We focus 1 This behavior has been referred to as "price momentum" in the literature (e.g., Glaeser et al. 2011).
At any given point of time in an actual economy, some individuals hold more money than other individuals do. This non-degenerate distribution of money holdings among individuals is a rationale for a range of policies designed for reallocating liquidity among individuals. However, monetary theory has often abstracted from this non-degenerate distribution for tractability reasons. In this paper, we construct a tractable search model of money with a non-degenerate distribution of money holdings. We model search as a directed process in the sense that buyers know the terms of trade before visiting particular sellers, as opposed to undirected search that has dominated the literature. In this model, the distribution of money holdings among individuals is non-degenerate. We show that this distribution affects individuals' decisions not directly, but rather indirectly only through a one-dimensional variable -the seller's future marginal value of money. This result drastically reduces the state space of individuals' decisions and makes the model tractable. We analytically characterize a monetary equilibrium, using lattice-theoretic techniques, and prove existence of a monetary steady state. In the equilibrium, buyers follow a stylized spending pattern over time, and the money distribution has a persistent wealth effect.JEL classifications:
At any given point of time in an actual economy, some individuals hold more money than other individuals do. This non-degenerate distribution of money holdings among individuals is a rationale for a range of policies designed for reallocating liquidity among individuals. However, monetary theory has often abstracted from this non-degenerate distribution for tractability reasons. In this paper, we construct a tractable search model of money with a non-degenerate distribution of money holdings. We model search as a directed process in the sense that buyers know the terms of trade before visiting particular sellers, as opposed to undirected search that has dominated the literature. In this model, the distribution of money holdings among individuals is non-degenerate. We show that this distribution affects individuals' decisions not directly, but rather indirectly only through a one-dimensional variable -the seller's future marginal value of money. This result drastically reduces the state space of individuals' decisions and makes the model tractable. We analytically characterize a monetary equilibrium, using lattice-theoretic techniques, and prove existence of a monetary steady state. In the equilibrium, buyers follow a stylized spending pattern over time, and the money distribution has a persistent wealth effect.JEL classifications:
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