Housing and Banking over the Business Cycle
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In this dissertation, I develop and study a dynamic general equilibrium (DSGE) model with housing and banking. The framework is used to explore several sets of issues related to housing and financial markets. In Chapter 2, I investigate the extent to which a disruption in banks' balance sheets affects the behavior of the housing market and the macroeconomy in an experiment that mimics the Great Recession. The model can qualitatively capture key features of the phenomenon of the Great Recession in response to a financial shock. In Chapter 3, I investigate the model's ability to more generally account for important features of the business cycle observed in the data. In particular, the model with estimated shocks replicates well several key features of housing and financial markets and the macroeconomy observed in the data. It can quantitatively account for the volatility and procyclicality of consumption, investment, house prices and some financial variables. It can also reproduce the co-movements among the quantities of interest. Moreover, I find that technology shocks are the main driving forces of fluctuations in the housing market and the macroeconomy, explaining more than 95 percent of the volatility in housing investment and house prices, and more than 85 percent of the volatility in consumption and GDP. Financial shocks and housing technology shocks are the primary driving forces of fluctuations in the financial market at business cycle frequencies, explaining more than 90 percent of the volatility in loans and net worth. In Chapter 4, I evaluate various macroprudential policies that might help to mitigate the volatility of house prices and household debts, both of which are perceived to be reliable indicators of financial distress historically. My simulation results show that countercyclical policies specifically designed to react to credit and house price growth are useful in stabilizing the financial and housing markets. Moreover, an asymmetric tax schedule that favours impatient households can reduce the volatility of both house prices and household debts without causing excess volatility in other macroeconomic variables. In this regard, this macroprudential policy can be viewed as an effective tool that can successfully contain both financial imbalances and housing market instability in a booming economy exhibiting rapid house price appreciation and credit expansion.