Working Papers

2019-09 | April 2021


A Theory of Housing Demand Shocks


Housing demand shock are used in the standard macroeconomic models as a primary source of the house price fluctuation and, through the collateral channel, a driver of macroeconomic fluctuations. We provide a microeconomic foundation for these reduced-form shocks within a tractable heterogeneous-agent framework. Unlike a housing demand shock in the standard models, a credit supply shock in our micro-founded model generates a positive correlation between the trading volume and the house price, as well as an arbitrarily large fluctuation of the price-to-rent ratio. These theoretical implications are robust to alternative forms of heterogeneity and in line with empirical evidence.

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Article Citation

Liu, Zheng, Pengfei Wang, and Tao Zha. 2019. "A Theory of Housing Demand Shocks," Federal Reserve Bank of San Francisco Working Paper 2019-09. Available at