Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-11-22T21:22:22.723Z Has data issue: false hasContentIssue false
  • English
  • Français

REGRESSIVE WELFARE EFFECTS OF HOUSING BUBBLES

Published online by Cambridge University Press:  26 December 2019

Andrew Graczyk  and
Toan Phan
Andrew Graczyk
Affiliation:
Wake Forest University
Toan Phan*
Affiliation:
The Federal Reserve Bank of Richmond and VCREME
*
Address correspondence to: Toan Phan, The Federal Reserve Bank of Richmond, 701 E Byrd St, Richmond, VA23219, USA. e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful for everyone, has regressive welfare effects. By raising the housing price, the bubble benefits high-income savers but negatively affects low-income borrowers. The key intuition is that, by creating a bubble in the market price, savers’ demand for the housing asset for investment purposes imposes a negative externality on borrowers, who only demand the housing asset for utility purposes. The model also implies a feedback loop: high-income inequality depresses the interest rates, facilitating the existence of housing bubbles, which in turn has regressive welfare effects.

Keywords

Rational BubbleInequalityHousingFinancial Friction
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 8 , December 2021 , pp. 2102 - 2127
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank the editor, the associate editor, two anonymous referees, Julien Bengui, Ippei Fujiwara, Lutz Hendricks, Guido Menzio, and Andrii Parkhomenko for helpful suggestions. Toan Phan is funded by Vietnam National Foundation for Science and Technology Development under grant number 502.01-2017.12. The views expressed herein are those of the authors and not those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

References

Abel, A. B., Mankiw, N. G., Summers, L. H. and Zeckhauser, R. J. (1989) Assessing dynamic efficiency: Theory and evidence. The Review of Economic Studies 56(1), 1–19.CrossRefGoogle Scholar
Aiyagari, R. S. (1994) Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109(3), 659–684.CrossRefGoogle Scholar
Arce, Ó. and López-Salido, D. (2011) Housing bubbles. American Economic Journal: Macroeconomics 3(1), 212–241.Google Scholar
Basco, S. (2016) Switching bubbles: From outside to inside bubbles. European Economic Review 87, 236–255.CrossRefGoogle Scholar
Bengui, J. and Phan, T. (2018) Asset pledgeability and endogenously levereaged bubbles. Journal of Economic Theory 177, 280–314.CrossRefGoogle Scholar
Bewley, T. (1977) The permanent income hypothesis: A theoretical formulation. Journal of Economic Theory 16(2), 252–292.CrossRefGoogle Scholar
Biswas, S., Hanson, A. and Phan, T. (2018) Bubbly Recessions. FRB Richmond Working Paper.CrossRefGoogle Scholar
loomberg (2016) Xi again pledges to curb speculation in china property market. https://www.bloomberg.com/news/articles/2016-12-22/xi-again-pledges-to-curb-speculation-in-china-property-market. December 21, 2016; Accessed: March 1, 2018.Google Scholar
Bloomberg (2017) Housing should be for Living in, not for Speculation, Xi Says. https://www.bloomberg.com/news/articles/2017-10-18/xi-renews-call-housing-should-be-for-living-in-not-speculation. October 18, 2017; Accessed March 1, 2018.Google Scholar
Caballero, R. J. and Krishnamurthy, A. (2006) Bubbles and capital flow volatility: Causes and risk management. Journal of Monetary Economics 53(1), 35–53.CrossRefGoogle Scholar
Diamond, P. A. (1965) National debt in a neoclassical growth model. The American Economic Review 55(5), 1126–1150.Google Scholar
Engsted, T., Hviid, S. J. and Pedersen, T. Q. (2016) Explosive bubbles in house prices? Evidence from the oecd countries. Journal of International Financial Markets, Institutions and Money 40, 14–25.CrossRefGoogle Scholar
Fang, H., Gu, Q., Xiong, W. and Zhou, L.-A. (2015) Demystifying the Chinese Housing Boom. Technical report, NBER Working Paper.CrossRefGoogle Scholar
Farhi, E. and Tirole, J. (2012) Bubbly liquidity. The Review of Economic Studies 79(2), 678–706.CrossRefGoogle Scholar
Geerolf, F. (2017) Reassessing Dynamic Efficiency. Working Paper.Google Scholar
Giglio, S., Maggiori, M. and Stroebel, J. (2016) No-bubble condition: Model-free tests in housing markets. Econometrica 84(3), 1047–1091.CrossRefGoogle Scholar
Grossman, G. M. and Yanagawa, N. (1993) Asset bubbles and endogenous growth. Journal of Monetary Economics 31(1), 3–19.CrossRefGoogle Scholar
Hillebrand, M. and Kikuchi, T. (2015) A mechanism for booms and busts in housing prices. Journal of Economic Dynamics and Control 51, 204–217.CrossRefGoogle Scholar
Hirano, T., Inaba, M. and Yanagawa, N. (2015) Asset bubbles and bailouts. Journal of Monetary Economics 76, S71–S89.CrossRefGoogle Scholar
Hirano, T. and Yanagawa, N. (2017) Asset bubbles, endogenous growth, and financial frictions. Review of Economic Studies 84, 406–443.CrossRefGoogle Scholar
Huggett, M. (1993) The risk-free rate in heterogeneous-agent incomplete-insurance economies. Journal of Economic Dynamics and Controls 17, 953–969.CrossRefGoogle Scholar
Hunter, W. C. (2005). Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies. Cambridge, MA: MIT press.Google Scholar
Ikeda, D. and Phan, T. (2016) Toxic asset bubbles. Economic Theory 61(2), 241–271.CrossRefGoogle Scholar
Ikeda, D. and Phan, T. (2019) Asset bubbles and global imbalances. American Economic Journal: Macroeconomics 11(3), 209–51.Google Scholar
Kikuchi, T. and Thepmongkol, A. (2019) Capital bubbles, interest rates and investment in a small open economy. Journal of Money, Credit and Banking (accepted).CrossRefGoogle Scholar
King, I. and Ferguson, D. (1993) Dynamic inefficiency, endogenous growth, and Ponzi games. Journal of Monetary Economics, 32(1):79–104.CrossRefGoogle Scholar
Martin, A. and Ventura, J. (2012) Economic growth with bubbles. American Economic Review 102(6), 3033–3058.CrossRefGoogle Scholar
Martin, A. and Ventura, J. (2017) The Macroeconomics of Rational Bubbles: A User’s Guide. Working paper.CrossRefGoogle Scholar
Mian, A. and Sufi, A. (2014) House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again. Chicago, IL: University of Chicago Press.CrossRefGoogle Scholar
Miao, J. (2014) Introduction to economic theory of bubbles. Journal of Mathematical Economics 53, 130–136.CrossRefGoogle Scholar
Miao, J. and Wang, P. (2012) Bubbles and total factor productivity. American Economic Review, Papers and Proceedings 102(3), 82–87.CrossRefGoogle Scholar
Miao, J. and Wang, P. (2018) Asset bubbles and credit constraints. American Economic Review 108(9), 2590–2628.CrossRefGoogle Scholar
Miao, J., Wang, P. and Zhou, J. (2015) Asset bubbles, collateral, and policy analysis. Journal of Monetary Economics 76, S57–S70.CrossRefGoogle Scholar
Nikkei Asian Review (2017) Can the rental market deflate china’s housing bubble? https://asia.nikkei.com/Viewpoints/Shen-Jianguang/Can-the-rental-market-deflate-China-s-housing-bubble. Online edition, October 2, 2017; Accessed March 1, 2018.Google Scholar
Saint-Paul, G. (1992) Fiscal policy in an endogenous growth model. The Quarterly Journal of Economics 107(4), 1243–1259.CrossRefGoogle Scholar
Samuelson, P. A. (1958) An exact consumption-loan model of interest with or without the social contrivance of money. The Journal of Political Economy 66(6), 467–482.CrossRefGoogle Scholar
Sargent, T. J. and Wallace, N. (1982) The real-bills doctrine versus the quantity theory: A reconsideration. Journal of Political Economy 90(6), 1212–1236.CrossRefGoogle Scholar
The Economist (2018) Stop speculating, start living: China is trying new ways of skimming housing-market froth. https://www.economist.com/news/china/21737069-party-wants-people-rent-china-trying-new-ways-skimming-housing-market-froth. Print edition, February 15, 2018; Accessed March 1, 2018.Google Scholar
Tirole, J. (1985) Asset bubbles and overlapping generations. Econometrica 53(6), 1499–1528.CrossRefGoogle Scholar
Wang, P. and Wen, Y. (2012) Speculative bubbles and financial crises. American Economic Journal: Macroeconomics 4(3), 184–221.Google Scholar
Zhao, B. (2015) Rational housing bubble. Economic Theory 60(1), 141–201.CrossRefGoogle Scholar