Essays on policies and housing market dynamics



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This dissertation is about the fiscal policy and the US housing market, Economic Policy Uncertainty (EPU) and house price inflation and house prices and stock prices impact on consumption in the US. The dissertation consists of the three chapters.

The first chapter discusses the fiscal policy and the housing market in the US. As the housing market plays a significant role in the macroeconomy, the fluctuations in the housing market influence different sectors of the economy and in-turn it is affected by many economic factors. This paper examines how fiscal policy influences the housing market in the United States empirically using the Structural Vector Auto-Regressive model (SVAR) model and theoretically using the Dynamic Stochastic General Equilibrium (DSGE) model. For empirical analysis, we used quarterly data and find that both government revenue shocks and government spending shocks have negative effects on house prices, building permits, housing starts, houses sold, and positive effects on houses supply. From the theoretical perspective, we calibrate a DSGE model with the housing problem. Results suggest the negative effects of government spending shocks on house prices. This indicates the result from the SVAR model is consistent with the DSGE model, which provides new insights into understanding the dynamics of the US housing market.

The second chapter focuses on the relationship between the Economic Policy Uncertainty (EPU) and house price inflation in the United States. The recent financial crisis began at the end of 2007 with the bursting of the house price bubble and affected a significant part of economy. Among many factors, uncertainty plays an important role in house price variability. This paper studies how Economic Policy Uncertainty (EPU) influences house price inflation in the United States. The Structural Vector Auto Regressive (SVAR) model was used as a tool of analysis by employing Cholesky decomposition placing EPU at the beginning of order. The results showed that increase in EPU decreases house price inflation. Furthermore, this research examined how EPU influenced house price inflation before the financial crisis and after the financial crisis 2007-09. The results indicated that increase in EPU decreases house price inflation in both of these time periods. In general, these results suggests that uncertainty and house price are negatively related and is one of the important determinants of house price inflation.

The third chapter analyzes the impact of wealth effects on consumption. Wealth plays an important role in consumption. Household wealth has two important components: housing wealth and financial wealth. This paper analyzes the impact of house prices and stock prices on consumption in the United States. A cointegration test was done and the vector error correction (VEC) model was used as the analysis tool. Both house prices and stock prices have a positive effect on consumption. Furthermore, the impact of stock prices is large but short-lived. Whereas the effect of house prices is gradually increasing and persistent.

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Housing Market, Fiscal Policy, Economic Policy Uncertainty and Wealth Effects