8. Housing Price Shocks |
Nominal housing wealth in the model is PKH*KH, where KH is the
real stock of housing and PKH is the market price of KH. Nominal housing
wealth enters in the definition of AA (equation 89), which is the wealth
variable that affects consumption demand (equations 1, 2, and 3). PKH is
determined (equation 55) as PSI14*PD, where PD is the price deflator for
domestic sales and PSI14 is exogenous. It is thus possible to change
housing wealth in the model by changing PSI14. For example, if you
think housing prices are going to fall (relative to PD) in the future,
you can decrease PSI14. This is done in the experiment in this chapter.
It allows you to see the estimated effects on the economy of falling
housing prices.
Experiment 8.1: Decrease in PSI14
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