Abstract
This paper quanti…es the importance of news shocks for housing market ‡uctuations. To this purpose, we extend Iacoviello and Neri (2010)’s model of the housing market to include news shocks and estimate it using Bayesian methods and U.S. data. We …nd that news shocks: (1) account for a sizable fraction of the variability in house prices and other macroeconomic variables over the business cycle and (2) signi…cantly contributed to booms and busts episodes in house prices over the last three decades. By linking news shocks to agents’expectations, we …nd that house price growth was positively related to in‡ation expectations during the boom of the late 1970’s while it was negatively related to interest rate expectations during the housing boom that peaked in the mid-2000’s.
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