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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Error correction dynamics of house prices: an equilibrium benchmark
Charles Ka Yui Leung
Abstract

Central to recent debates on the "mis-pricing" in the housing market and the proactive policy of central bank is the determination of the "fundamental house price." This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible "mis-pricing" in the housing market.


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Charles Ka Yui Leung, Error correction dynamics of house prices: an equilibrium benchmark, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 177, 13 May 2014.
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Note: Published as: Leung, Charles Ka Yui (2014), "Error Correction Dynamics of House Prices: An Equilibrium Benchmark," Journal of Housing Economics 25: 75-95.
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DOI: 10.24149/gwp177
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