Revisiting housing and the business cycle

This paper revisits the interactions between housing dynamics and the business cycle in a two-sector model developed and calibrated from the multi-sector neoclassical growth model originally envisioned by Davis and Heathcote in 2005. A two-sector model with housing sector specific capital and productivity shocks can successfully predict a correct positive correlation between housing prices and residential investment. The model can also replicate the fact observed in the United States that housing prices are more volatile than output.