Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154366
Authors: 
Gazzani, Andrea
Year of Publication: 
2016
Series/Report no.: 
ECB Working Paper 1933
Abstract: 
Housing prices are subject to boom and bust episodes with long-lasting deviation from fundamentals. By considering a present value housing price model under noisy information, I study the macroeconomic implications of movements in housing prices related (news) and not related (noise) to future fundamentals. I provide empirical evidence of the sizable macroeconomic effects of news and noise shocks. Following Forni et al. (2014, 2016), I identify news and noise shocks through a non-standard VAR technique which exploits future information. In the US, news shocks are the main driver of the housing market at low frequencies, but in the short-medium horizon noise shocks explain a large share of the variability in housing prices, residential investment and GDP. Historically, many housing cycles are driven by noise. The empirical findings are consistent with a model à la Iacoviello which features a rental market. In this model, the usual optimal policy exercise concerns an augmented Taylor rule and a pro-cyclical loan-to-value ratio. I propose pro-cyclical property taxes as the most effective policy tool to deal with fluctuations originating from the housing market.
Subjects: 
housing market
macro-prudential
noise
non-fundamental VAR
property tax
JEL: 
E30
E40
E50
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2181-7
Document Type: 
Working Paper

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