HOUSING WEALTH AND THE ECONOMY ADJUSTMENT TO UNANTICIPATED SHOCKS

This paper explores the effect of housing capital losses on the econom y's response to an unanticipated negative shock. The analysis is based on an overlapping-generations model where income is exogenous and mor tgage funds come from outside the economy. Because of housing capital losses, the economy exhibits a volatile response to a negative income shock, with transitional rents, house prices, and consumption levels l ying below the values achieved in the new steady state. The volatility of the response is shown to depend on the distribution of housing own ership.