The Czech Housing Market Through the Lens of a DSGE Model Containing Collateral-Constrained Households

Jaromír Tonner, Jan Brůha

We incorporate a housing market with liquidity-constrained households into the Czech National Bank’s core forecasting model (g3) to analyze the relationship between housing market and aggregate
fluctuations in a small open economy framework. We discuss the historical shock decomposition of house prices and interpret the results in the light of recent empirical work. For a wide range of model calibrations, the interaction between the housing market and the aggregate economy is weak and so the monetary policy implications of house price fluctuations for the Czech Republic are not strong. We interpret this – in line with recent empirical evidence – as an indication that the wealth effects stemming from house ownership are not significant in the Czech Republic. Nevertheless, we show that the collateral mechanism significantly improves the forecasting properties of the extended model, especially for private consumption. This indicates the importance of the collateral effect, which can be caused by assets other than houses.

JEL codes: E32, E37, R31

Keywords: Aggregate consumption, DSGE models, housing market

Issued: December 2014

Download: CNB WP 9/2014 (pdf, 1 MB)