Complex Methods in Economics: An Example of Behavioral Heterogeneity in House Prices

32 Pages Posted: 28 Dec 2011 Last revised: 16 Feb 2012

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

Maria Demertzis

Bruegel

Cees G. H. Diks

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Marco van der Leij

CeNDEF, University of Amsterdam; Tinbergen Institute; De Nederlandsche Bank - Research Department

Date Written: December 27, 2011

Abstract

We show how simple statistical techniques for capturing critical transitions used in natural sciences, fail to capture economic regime shifts. This implies that we need to use model-based approaches to identify critical transitions. We apply a heterogenous agents model in a standard housing market model to show that these family of models generate non-linear responses that can capture such transitions. We estimate this model for the United States and the Netherlands and find that first, the data does capture the heterogeneity in expectations and, second, that the qualitative predictions of such nonlinear models are very different to standard linear benchmarks. It would be important to identify which approach can serve best as an early warning indicator.

Keywords: critical transitions, heterogenous agents model, bounded rationality, housing prices

JEL Classification: C53, R21, R31

Suggested Citation

Bolt, Wilko and Demertzis, Maria and Diks, Cees G. H. and van der Leij, Marco Juri, Complex Methods in Economics: An Example of Behavioral Heterogeneity in House Prices (December 27, 2011). De Nederlandsche Bank Working Paper No. 329. Available at SSRN: https://ssrn.com/abstract=1977238 or http://dx.doi.org/10.2139/ssrn.1977238

Wilko Bolt (Contact Author)

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

Cees G. H. Diks

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 53 29 (Phone)
+31 20 525 4349 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Marco Juri van der Leij

CeNDEF, University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands
+31 20 525 7356 (Phone)

HOME PAGE: http://home.staff.uva.nl/m.j.vanderleij

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
39
Abstract Views
415
PlumX Metrics