Zheng Liu, Pengfei Wang, and Tao Zha
Working Paper 2019-04
March 2019

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Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.

JEL classification: E21, E44, G21

Key words: price-rent puzzle, heterogeneity, marginal agent, cutoff point, liquidity premium, price-to-rent ratio, collateral constraint


The research is supported in part by the National Science Foundation Grant SES 1558486 through the National Bureau of Economic Research and by the National Natural Science Foundation of China Project Numbers 71633003, 71742004, and 71473168. For helpful comments, the authors are grateful to Regis Barnichon, Adam Guren, Oscar Jorda, Greg Kaplan, Monika Piazzesi, Amir Sufi, and Gianluca Violante. They also thank seminar and conference participants at the Federal Reserve Bank of San Francisco, Academia Sinica (Taipei), the 2018 Academy of Financial Research Summer Institute of Economics and Finance at Zhejiang University, University of California Santa Cruz, University of Chicago, and the 2018 Hong Kong University of Science and Technology Workshop on Macroeconomics. Eric Tallman provided excellent research assistance. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Banks of Atlanta and San Francisco or the Federal Reserve System or National Bureau of Economic Research. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Zheng Liu, Research Department, Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105, zliu001@gmail.com; Pengfei Wang, Department of Economics, Hong Kong University of Science and Technology, Hong Kong, pfwanghkust@gmail.com; or Tao Zha, Research Department, Federal Reserve Bank of Atlanta, Emory University, and NBER, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8353, zmail@tzha.net.
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