Skip to main content Accessibility help
×
Home

REGRESSIVE WELFARE EFFECTS OF HOUSING BUBBLES

  • Andrew Graczyk (a1) and Toan Phan (a2)

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.

Copyright

Corresponding author

Address correspondence to: Toan Phan, The Federal Reserve Bank of Richmond, 701 E Byrd St, Richmond, VA23219, USA. e-mail: toanvphan@gmail.com.

Footnotes

Hide All

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.

Footnotes

References

Hide All
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), 119.
Aiyagari, R. S. (1994) Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109(3), 659684.
Arce, Ó. and López-Salido, D. (2011) Housing bubbles. American Economic Journal: Macroeconomics 3(1), 212241.
Basco, S. (2016) Switching bubbles: From outside to inside bubbles. European Economic Review 87, 236255.
Bengui, J. and Phan, T. (2018) Asset pledgeability and endogenously levereaged bubbles. Journal of Economic Theory 177, 280314.
Bewley, T. (1977) The permanent income hypothesis: A theoretical formulation. Journal of Economic Theory 16(2), 252292.
Biswas, S., Hanson, A. and Phan, T. (2018) Bubbly Recessions. FRB Richmond Working Paper.
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.
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.
Caballero, R. J. and Krishnamurthy, A. (2006) Bubbles and capital flow volatility: Causes and risk management. Journal of Monetary Economics 53(1), 3553.
Diamond, P. A. (1965) National debt in a neoclassical growth model. The American Economic Review 55(5), 11261150.
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, 1425.
Fang, H., Gu, Q., Xiong, W. and Zhou, L.-A. (2015) Demystifying the Chinese Housing Boom. Technical report, NBER Working Paper.
Farhi, E. and Tirole, J. (2012) Bubbly liquidity. The Review of Economic Studies 79(2), 678706.
Geerolf, F. (2017) Reassessing Dynamic Efficiency. Working Paper.
Giglio, S., Maggiori, M. and Stroebel, J. (2016) No-bubble condition: Model-free tests in housing markets. Econometrica 84(3), 10471091.
Grossman, G. M. and Yanagawa, N. (1993) Asset bubbles and endogenous growth. Journal of Monetary Economics 31(1), 319.
Hillebrand, M. and Kikuchi, T. (2015) A mechanism for booms and busts in housing prices. Journal of Economic Dynamics and Control 51, 204217.
Hirano, T., Inaba, M. and Yanagawa, N. (2015) Asset bubbles and bailouts. Journal of Monetary Economics 76, S71S89.
Hirano, T. and Yanagawa, N. (2017) Asset bubbles, endogenous growth, and financial frictions. Review of Economic Studies 84, 406443.
Huggett, M. (1993) The risk-free rate in heterogeneous-agent incomplete-insurance economies. Journal of Economic Dynamics and Controls 17, 953969.
Hunter, W. C. (2005). Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies. Cambridge, MA: MIT press.
Ikeda, D. and Phan, T. (2016) Toxic asset bubbles. Economic Theory 61(2), 241271.
Ikeda, D. and Phan, T. (2019) Asset bubbles and global imbalances. American Economic Journal: Macroeconomics 11(3), 209–51.
Kikuchi, T. and Thepmongkol, A. (2019) Capital bubbles, interest rates and investment in a small open economy. Journal of Money, Credit and Banking (accepted).
King, I. and Ferguson, D. (1993) Dynamic inefficiency, endogenous growth, and Ponzi games. Journal of Monetary Economics, 32(1):79104.
Martin, A. and Ventura, J. (2012) Economic growth with bubbles. American Economic Review 102(6), 30333058.
Martin, A. and Ventura, J. (2017) The Macroeconomics of Rational Bubbles: A User’s Guide. Working paper.
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.
Miao, J. (2014) Introduction to economic theory of bubbles. Journal of Mathematical Economics 53, 130136.
Miao, J. and Wang, P. (2012) Bubbles and total factor productivity. American Economic Review, Papers and Proceedings 102(3), 8287.
Miao, J. and Wang, P. (2018) Asset bubbles and credit constraints. American Economic Review 108(9), 25902628.
Miao, J., Wang, P. and Zhou, J. (2015) Asset bubbles, collateral, and policy analysis. Journal of Monetary Economics 76, S57S70.
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.
Saint-Paul, G. (1992) Fiscal policy in an endogenous growth model. The Quarterly Journal of Economics 107(4), 12431259.
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), 467482.
Sargent, T. J. and Wallace, N. (1982) The real-bills doctrine versus the quantity theory: A reconsideration. Journal of Political Economy 90(6), 12121236.
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.
Tirole, J. (1985) Asset bubbles and overlapping generations. Econometrica 53(6), 14991528.
Wang, P. and Wen, Y. (2012) Speculative bubbles and financial crises. American Economic Journal: Macroeconomics 4(3), 184221.
Zhao, B. (2015) Rational housing bubble. Economic Theory 60(1), 141201.

Keywords

REGRESSIVE WELFARE EFFECTS OF HOUSING BUBBLES

  • Andrew Graczyk (a1) and Toan Phan (a2)

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed