Bubbly booms and welfare

• Main Authors: DONG, Feng, JIAO, Yang, SUN, Haoning
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: Collateral effect; Credit constraint; Crowd-out effect; Housing bubble; Housing policies; Econometrics; Finance; Real Estate
• Online Access: https://ink.library.smu.edu.sg/soe_research/2739; https://ink.library.smu.edu.sg/context/soe_research/article/3738/viewcontent/SSRN_id4502993.pdf
• Institution: Singapore Management University

We show the competing effects of a housing bubble on the real economy by developing a multi-sector dynamic model with housing production. On the one hand, firms can sell or collateralize their housing, so a housing bubble helps firms obtain credit to finance their investment and expand production. On the other hand, a boom in the housing sector crowds out labor in the non-housing sector. We show that housing booms can reduce social welfare both in the steady state and in the transitional dynamics only when the production externalities in the non-housing sector are sufficiently large. We quantitatively evaluate our model and demonstrate its robustness with model extensions. Policies that target labor, housing transactions and output generate different welfare implications.