News, Housing Boom-Bust Cycles, and Monetary Policy

June 18, 2014

By Birol Kanik and Wei Xiao

We explore the possibility that a housing market boom-bust cycle may arise when public beliefs are driven by news shocks. News, imperfect and noisy by nature, may generate expectations that are overly optimistic or pessimistic. Over-optimism easily leads to excessive accumulation of housing assets, and creates a housing boom that is not based on fundamentals. When the news is found false or inaccurate, investors revert their actions, and a downturn in the housing market follows. By altering agents’ net worth conditions, a housing cycle can have significant repercussions in the aggregate economy. In this paper, we construct a dynamic general equilibrium model that can give rise to a news-driven housing boom-bust cycle, and we consider how monetary policies should respond to it.

What the abstract does not mention is that the news shocks does not pertain directly to the housing market. The mechanism is as follows. Positive news about increase expected future net worth, which raise aggregate demand, include housing. The higher house prices relax borrowing contraints as houses are used as collateral, which amplifies the total effect. We have thus an amplifier running entirely on news.


Fiscal Stimuli in the Form of Job Creation Subsidies

June 16, 2014

By Chun-Hung Kuo and Hiroaki Miyamoto

This paper examines the effects of fiscal stimuli in the form of job creation subsidies in a DSGE model with search frictions in the labor market. We consider two types of job creation subsidies: a subsidy to the cost of posting vacancies and a hiring subsidy. Our model demonstrates that qualitative effects of a vacancy cost subsidy are similar to those of a hiring subsidy. Quantitatively, however, the vacancy cost subsidy is more effective in lowering unemployment than the hiring subsidy. We also compute fiscal multipliers for both traditional increases in government spending and increases in job creation subsidies.

The two stimuli have the same cost to the government, and as the firm is risk-neutral, taking one or the other does not affect directly the value of posting a vacancy. As so often in general equilibrium models, the action is all in the derivatives. A posting subsidy encourages directly firms to post, but to hire only indirectly. A hiring subsidy is more targeted, and thus more effective, and even more so than spending that subsidy in general public expenses, which are of course the least targeted.

The One-Child Policy and Household Savings

June 4, 2014

By Taha Choukhmane, Nicolas Coeurdacier and Keyu Jin

We ask how much the advent of the ‘one child policy’ can explain the sharp rise in China’s household saving rate. In a life-cycle model with endogenous fertility, intergenerational transfers and human capital accumulation, we show a macroeconomic and a microeconomic channel through which restrictions in fertility raise aggregate saving. The macro-channel operates through a shift in the composition of demographics and income across generations. The micro-channel alters saving behaviour and education decisions at the individual level. A main objective is to quantify these various channels in the data. Exploiting the birth of twins as an identification strategy, we provide direct empirical evidence on the micro-channel and show its quantitative relevance in accounting for the rise in the household saving rate since the inception of the policy in 1980. Our quantitative OLG model can explain from a third to at most 60% of the rise in aggregate saving rate; equally important is its implied shift in the level and shape of the age-saving profile consistent with micro-level estimates from the data.

The main mechanism at play in this paper are the transfers from children to parents, whose amount is decreasing in the number of children. Once parents are restricted to one child, they need to compensate with their own savings to obtain the desired level of consumption in retirement. The social convention that children help their parents and social security (rather, its absence) are left untouched to isolate the impact of the child policy. While the latter is big, it may be mitigated or amplified by social and institutional change that accompanied the child policy and may in fact be a consequence of it. A China specialist may weigh in here. It is nevertheless an interesting paper.