The Effect of Housing Market Fluctuations on Macroeconomy: A DSGE Approach

The main objective of this study is to examine the effect of housing market on real sector of economy and to identify its role in business cycle process. To this end, the paper has used a Dynamic Stochastic General Equilibrium Model. The specific feature of this models is that it has containes two types of households: Patient and Impatient. Patient households had greater discount factor. They save and accumulate capital and they produce goods and services. Patient households also supply funds to impatient households who have smaller discount factor. The maximum amount which impatient households can borrow depends on the value of house owned by them. In fact, this assumption tries to impose the collateral constraint which emphasized by Bernanke (1995) in the model. This channel has a crucial role in transmitting the housing market shocks to real sector. To estimate the model, we used both Calibration and Bayesian approaches. We estimated the model using quarterly data over the period 2005Q1–2017Q4. Results of IRFs indicated that a positive shock to housing preference (housing demand shock) generated an increase in Real Housing Prices, Real Investment in Housing and Non-housing Sectors, Real Consumption and Real GDP. Also to identify the role of collateral effect in the positive relationship between housing and real sector we set the amount of collateral effect in the model equal to zero and then we calculated IRFs again based on this assumption. Results showed that collateral effect have played a key role in transmission mechanism of housing shocks to real sector.