The Effect of New Housing Supply in Structural Models: A Forecasting Performance Evaluation
Published in , 2009
This paper investigates the importance of including data on new housing supply in Dynamic Stochastic General Equilibrium (DSGE) models in forecasting the Great Financial Crisis (GFC). While previous models have added a financial sector and real estate sector, they have largely ignored the housing supply. For this, I develop an extended DSGE model that includes both the financial sector and an endogenous housing supply and show that forecasting accuracy significantly improves when data on new houses is included. I conduct a rigorous robustness check to confirm the importance of these additions to the model. The findings demonstrate that the combination of the extended model and housing supply data is necessary for accurate forecasting during periods of economic crisis. Negative housing demand shocks were crucial in the emergence of the GFC, as they propagated into the real economy and got accelerated through the financial sector.
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