A Note on Learning, House Prices, and Macro-Financial Linkages

In the USA, the linkages between the housing market, the credit market, and the real sector have been striking in the past decades. To explain these linkages, I develop a small-scale dynamic stochastic general equilibrium (DSGE) model in which agents update non-rational beliefs about future house price growth, in accord with recent survey data evidence. Both standard productivity shocks and shocks in the credit sector generate endogenously persistent booms in house prices. Long-lasting excess volatility in house prices, in turn, affects the financial sector and propagates to the real sector. This amplification and propagation mechanism improves the ability of the model to explain empirical puzzles in the US housing market and to explain the macro-financial linkages during 1985−2019. The learning model can also replicate the predictability of forecast errors evidenced in recent survey data.