Learning from House Prices: Amplification and Business Fluctuations

57 Pages Posted: 4 Dec 2019

See all articles by Ryan Chahrour

Ryan Chahrour

Boston College - Department of Economics

Gaetano Gaballo

HEC Paris

Date Written: November 2019

Abstract

We provide a new theory of demand-driven business cycles based on learning from prices in an otherwise frictionless real model. In our model, house price increases caused by aggregate disturbances may be misinterpreted as a signal of improved local consumption prospects, leading households to demand more current consumption and housing. Higher demand reinforces the initial price increase in an amplification loop that drives comovement in output, labor, residential investment, and house prices even in response to aggregate supply shocks. The model's qualitative implications are consistent with observed business cycles, and it can explain apparently autonomous changes in sentiment without resorting to non-fundamental shocks.

Keywords: animal spirits, Demand Shocks, House Prices, imperfect information

JEL Classification: D82, D83, E03

Suggested Citation

Chahrour, Ryan A. and Gaballo, Gaetano, Learning from House Prices: Amplification and Business Fluctuations (November 2019). CEPR Discussion Paper No. DP14120, Available at SSRN: https://ssrn.com/abstract=3496609

Ryan A. Chahrour (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

HOME PAGE: http://www.chahrour.net

Gaetano Gaballo

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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