Abstract
Central to recent debates on the mis-pricing in the housing market and the proactive policy of central bank is the determination of the fundamental house price. This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible mis-pricing in the housing market.
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Schedule a callMore From: Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Papers
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