Paper Summary Comments Conclusion
Discussion of :
House Price Booms and the Current Account by Klaus Adam, Pei Kuang and Albert Marcet
Vivien Lewis (Ghent University and Goethe University Frankfurt)
Frankfurt-Mannheim Macro Workshop 30th May 2011
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
IMF World Economic Outlook 2009 Chapter 3, …gure 3.9
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
ECB Monthly Bulletin August 2007
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Evidence and Aim of Paper
Evidence US, 1996-2006 : house price boom and widening current account (CA) de…cit consumption and construction boom
US, 2006-2008 : reversal in house price and CA developments
Similar picture in other G7 countries, though some heterogeneity Aim of Paper Model that accounts jointly for house price and CA dynamics
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model and Results
Model 2 assets : housing and internationally traded riskless bond Borrowing constraint : can borrow fraction of housing wealth Exogenous income ; endogenous housing production Agents learn about price mechanism Results Learning model can account for persistent house price booms ; di¢ cult to achieve with Rational Expectations (RE) model Endogenous international borrowing constraint creates negative link between house prices and CA.
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Discussion Outline
Discussion is in two parts : (1) Model Validation (2) Other Comments Matching Cross-Country Evidence Houses vs Other Assets Belief Speci…cation Alternative Stories
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Validation of Learning Model Learning and asset prices Application of learning in asset pricing model ) explain volatility and persistence puzzles Here, asset in question is housing Asset pricing model : current price determined by fundamental price and expected future price Model validation Use data on fundamental price and generate arti…cial asset price under RE vs Learning Calibrate model parameters and learning gain Compare arti…cial data moments to empirical counterparts Lewis and Markiewicz (BEJM 2009) : application to foreign exchange market
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Asset Pricing Model of Exchange Rates Lewis-Markiewicz (2009)
Exchange rate qt = weighted average of current fundamental value (small weight) and expected future value : ) 0 ft + EtP qt+1
qt = (1
Monetary model à la Frenkel (1976), Bilson (1978). Fundamentals 0 ft = (f1t ; f2t ) are relative money and output : f1t = mt Parameters : =
mt ,
a2 , 1 + a2
f2t = yt
yt 0
= (1; a1 ) ;
where a1 =income-elasticity of money demand, a2 =interest semi-elasticity of money demand
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Exchange Rate under Learning vs RE Lewis-Markiewicz (2009)
What we do Collect data on fundamentals ft (exogenous, does not depend on qt ) Calibrate and using values from the literature Compute implied exchange rate under Learning and RE Find learning gain g such that min s:d:( qtlearn ) g
s:d:( qtdata )
2
Compare other moments of qtlearn and qtRE to those of qtdata What we …nd s:d:( qtdata ) can be reproduced with reasonable gain parameter s:d:(qtlearn ) too high ; corr (qtlearn ; ft ) too high
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Asset Pricing Model of House Prices Adam-Kuang-Marcet (2011)
House price qt = sum of current fundamental value and expected discounted future value : qt = G 0 (H ss ) Fundamental house price is G 0 (H ss )
+ EtP qt+1
t t;
with linear G ( )-function, where :
= housing preference shock / rental price for housing services G (H ) = marginal utility of steady state housing services t
0
ss
Parameters : < 1, R where =discount factor, d =depreciation of housing, housing used as collateral, R =world interest rate = (1
d
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
)+
=share of
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
House Price under Learning vs RE Adam-Kuang-Marcet (2011)
Model validation exercise Collect data on rental price t (exogenous, does not depend on qt ) Calibration : = :96, d = 0:03, = :26, R = 1:0335, such that = 0:9332 Compute implied house price under learning and RE Use one data moment to calibrate learning gain Compare other moments of qtlearn and qtRE to those of qtdata
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Matching Cross-Country Evidence Small open economy model to explain house prices and CA Attempt to explain both time dimension and cross-country dimension World trade consistency not guaranteed : When adding up predicted CA in all countries, should get approx. 0 : no world CA de…cit (see Fig 10, need to multiply by GDP) Model predicts house price booms in all countries (see Fig 9) ) implies CA de…cits everywhere ( ?) Imposing trade consistency would imply global house price boom is impossible ( ?) Suggestion : de-emphasise cross-country matching and focus on US experience. Earlier house price booms in US ?
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Earlier House Price Boom in US ?
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Houses vs other Assets
Paper applies asset pricing model to housing Future house price is important : housing wealth used as collateral for borrowing Piazzesi and Schneider (2009, cited) summarise di¤erences between houses and other assets : higher transactions costs ) low volume of transactions relative to housing value not standardised assets traded in highly competitive markets ; instead, search and bargaining agents tend to own one house per person
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Belief Speci…cation
In Adam, Kuang and Marcet (2011), all agents have same beliefs Piazzesi and Schneider (2009, cited) document time-varying belief heterogeneity regarding house prices Similar evidence in forex market : Cheung and Chinn (2001) Share of optimistic vs pessimistic agents may play role in driving price dynamics
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Alternative Stories : Housing Price Booms Ho¤mann, Krause and Laubach (2011) Same features as in AKM (2011) : Housing provides services and is used as collateral for borrowing Exogenous real interest rate ; US is a small open economy Di¤erent from AKM (2011) : Production economy with uncertainty about future income growth Productivity growth subject to permanent and transitory shocks Agents solve signal extraction problem ) large swings in house prices in response to growth rate shock in non-housing sector
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Model Validation Other Remarks
Alternative Stories : Housing Price and CA Dynamics
Ferrero (2011) Same features as in AKM (2011) : Housing provides services and is used as collateral for borrowing Di¤erent from AKM (2011) : Two-country model with goods production and …xed housing stock Reductions in loan-to-value requirement boost leverage and housing demand ) gradual loosening of borrowing constraint through (slow) process of credit market liberalisation
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
Conclusion
Contribution : application of learning in asset pricing model to housing Main message : learning model successfully generates persistent house price booms Secondary : CA dynamics through collateral constraint on borrowing. Same feature in Ho¤mann et al (2011), Ferrero (2011); Punzi (2006) Some suggestions : Model validation using data on rental price De-emphasise cross-country dimension Consider introducing heterogeneity in beliefs Discuss special features of housing relative to other assets
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
References (1)
Bilson, John F. (1978). The Monetary Approach to the Exchange Rate : Some Empirical Evidence, IMF Sta¤ Papers 25, 48–75. Cheung, Yin-Wong and Menzie Chinn (2001). Currency Traders and Exchange Rate Dynamics : A Survey of the U.S. Market, Journal of International Money and Finance 20(4), 439-471. Ferrero, Andrea (2011). House Price Booms and Current Account De…cits, manuscript. Frenkel, Jacob A. (1976). A Monetary Approach to the Exchange Rate : Doctrinal Aspects and Empirical Evidence, Scandinavian Journal of Economics 78(2), 200–224.
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
Paper Summary Comments Conclusion
References (2) Ho¤mann, Mathias ; Michael Krause and Thomas Laubach (2011). Trend Growth Expectations and Borrowing Constraints : Understanding U.S. House Prices Before and After the Crisis, manuscript. Lewis, Vivien and Agnieszka Markiewicz (2009). Model Misspeci…cation, Learning and the Exchange Rate Disconnect Puzzle, B.E. Journal of Macroeconomics 9(1). Piazzesi, Monika and Martin Schneider (2009). Momentum Traders in the Housing Market : Survey Evidence and a Search Model, American Economic Review 99(2), 406-11. Punzi, Maria Teresa (2006). Housing Market and Current Account Imbalances in the International Economy, manuscript.
Vivien Lewis (Ghent Uni and Goethe Uni Frankfurt)
Lewis : Discussion of Adam-Kuang-Marcet
