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Job Market Paper:
Overbuilding and Underinvestment over Housing Boom-Bust Cycles
Abstract:
In this paper, I unveil a novel mechanism through which a housing market boom can lead to a deep recession by decreasing the physical investment and rendering capital scarce. This inefficiency arises from a crowding-out effect: the available liquidity, which could otherwise be channeled into firms’ capital investments (e.g., factories, equipment, R&D), is redirected toward the residential sector. The crowded-out physical investment subsequently amplifies the losses of the bust and prolongs the duration of the recession. Employing a new identification method of a shock that generates housing boom-bust cycles via a structural vector regression model, this paper empirically verifies the crowding-out effect and finds that a 2% jump in housing prices can crowd out 1% physical investment at the peak. Then, I develop a heterogeneous household model to quantify this welfare effects of this novel mechanism, It documents that the crowding-out effect can account for up to 13% of the welfare losses during the recession period. Finally, I show that a macroprudential policy targeting the overheated housing market can significantly alleviate the crowding-out effect and welfare losses.
Research Interests:
Macroeconomics of Household Heterogeneity, Inequality, Monetary and Macroprudential Policies, and Quantitative Methods for Empirical (VAR) and Numerical (HANK) Analysis
Personal website:
https://www.shixiang.best/