Bubbly booms and welfare

We show the competing effects of a housing bubble on the real economy by developing a multi-sector dynamic model with housing production. On the one hand, firms can sell or collateralize their housing, so a housing bubble helps firms obtain credit to finance their investment and expand production. O...

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Bibliographic Details
Published in:Review of economic dynamics 2024-07, Vol.53, p.71-122
Main Authors: Dong, Feng, Jiao, Yang, Sun, Haoning
Format: Article
Language:English
Subjects:
Collateral effect
Credit constraint
Crowd-out effect
Housing bubble
Housing policies
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Summary:We show the competing effects of a housing bubble on the real economy by developing a multi-sector dynamic model with housing production. On the one hand, firms can sell or collateralize their housing, so a housing bubble helps firms obtain credit to finance their investment and expand production. On the other hand, a boom in the housing sector crowds out labor in the non-housing sector. We show that housing booms can reduce social welfare both in the steady state and in the transitional dynamics only when the production externalities in the non-housing sector are sufficiently large. We quantitatively evaluate our model and demonstrate its robustness with model extensions. Policies that target labor, housing transactions and output generate different welfare implications.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2024.02.001