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Abstract: I present a dynamic, analytically tractable model of the housing market in which housing is segmented by various quality tiers. The presence of indivisibilities accords to housing various asset pricing implications that differ substantially from the homogeneous housing stock benchmark, and create an amplification channel for the propagation of macroeconomic shocks through housing wealth effects. In the presence of household heterogeneity, aggregate shocks have a differential impact on households’ willingness to pay for additional housing services, which creates heterogeneity in the incidence of capital gains. Hence, market segmentation can create a positive covariance between capital gains and marginal propensities to consume, which amplifies the effect of house price changes on consumption expenditures. The data provides support to the predictions of the theory.

Advisor: Gianluca Violante