Job Market Paper
United in Booms, Divided in Busts: Regional House Price Cycles and Monetary Policy, joint with Ulrich Roschitsch.
Abstract: This paper shows that regional disparities in house price growth are more pronounced during house price busts than during booms. To explain this observation we construct a two-region currency union model incorporating a housing sector and extrapolative belief updating regarding house prices. To solve the model, we propose a new method that efficiently handles extrapolative belief updating in a wide class of structural models. We show that intensified extrapolation in busts and regional housing market heterogeneities jointly explain elevated regional house price growth dispersion in busts and muted dispersion in booms. Consistent with our theory, we provide empirical evidence that house price belief updating is indeed more pronounced in busts and document that regional heterogeneities on the housing supply side affect regional house prices. Quantitatively our model can match the empirically observed elevated regional house price growth dispersion in busts. Moreover, we demonstrate that a monetary authority targeting house prices may reduce the volatility of output and house prices, as well as regional house price growth disparities. This policy is welfare-improving relative to an inflation-targeting benchmark.
Working Papers
House Price Extrapolation and Business Cycles: A Two-Agent New Keynesian Approach, joint with Ulrich Roschitsch.
Abstract: This paper examines the interaction between housing and business cycles in a tractable two-agent New Keynesian model featuring extrapolative house price beliefs. The model includes a saver and a hand-to-mouth borrower who uses housing as collateral. We identify four key transmission channels from housing markets to aggregate output: consumption, residential investment, collateral, and fire sales. Under rational expectations, output volatility is limited and primarily driven by consumption. In contrast, extrapolative beliefs significantly amplify output volatility, mainly through residential investment. Finally, we propose a novel solution approach for two-agent models with asset trade and asset price extrapolation, which is essential for solving models with fire sale motives.Transmission of Monetary Policy in a Currency Area with Heterogenous Households, joint with Lukas Hack.
Abstract: Monetary policy has heterogeneous effects on real GDP and inflation across Euro Area member states. To investigate the underlying drivers we construct a two-region currency union model with idiosyncratic risk and cross-region household heterogeneity. The model matches household-level heterogeneity in homeownership rates, mortgage types, and the prevalence of hand-to-mouth households. These features account for 70% of the cross-region differences in GDP responses to monetary policy shocks. This is primarily driven by the interplay of demand amplification through hand-to-mouth households, and demand dampening through trade effects.
Work in Progress
Accounting for Irrationality: Business Cycles under Subjective Beliefs, joint with Ulrich Roschitsch.