Research Discussion Papers, Bank of Finland
No 8/2008:
On the importance of borrowing constraints for house price dynamics
Essi Eerola ()
and Niku Määttänen ()
Abstract: We study how a household borrowing constraint the the form
of a down payment requirement affects house price dynamics in an OLG model
with standard preferences. We find that in certain situations the borrowing
constraint shapes house price dynamics substantially. The importance of the
constraint depends very much on whether house price changes are driven by
interest rate or aggregate income shocks. Moreover, because of the
borrowing constraint, house price dynamics display substantial asymmetries
between large positive and large negative income shocks. These results are
related to the fact that the share of borrowing-constrained households is
different following different shocks.
Keywords: house prices; dynamics; borrowing constraints; down payment constraint; (follow links to similar papers)
JEL-Codes: E21; R21; (follow links to similar papers)
40 pages, March 17, 2008
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