We integrate the housing market and the labor market in a dynamic general equilibrium model with credit and search frictions. The model is confronted with the U.S. macroeconomic time series. Our estimated model can account for two prominent facts observed in the data. First, the land price and the unemployment rate tend to move in opposite directions over the business cycle. Second, a shock that moves the land price is capable of generating large volatility in unemployment. Our estimation indicates that a 10 percent drop in the land price leads to a 0.34 percentage point increase in the unemployment rate (relative to its steady state).
JEL classification: E21, E27, E32, E44
Key words: Housing and labor markets, volatility, match value of employment, marginal utility of consumption, credit channel, labor channel
Critical comments from Larry Christiano have led to a significant improvement of this paper. The authors thank Marty Eichenbaum, Pat Higgins, Nir Jaimovich, Alejandro Justiniano, Monika Piazzesi, Pietro Peretto, Sergio Rebelo, Richard Rogerson, Martin Schneider, Lars Svensson, and seminar participants at Duke University, the European Central Bank, the Federal Reserve Banks of Atlanta, Chicago, and San Francisco, Goethe University, NBER Summer Institute, Northwestern-Tsinghua Macro Conference, the Sveriges Riksbank, the University of Chicago, and University of Georgia for helpful discussions. The views expressed here are the authors' and not necessarily those of the Federal Reserve Banks of Atlanta and San Francisco or the Federal Reserve System or the National Bureau of Economic Research. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Zheng Liu, Federal Reserve Bank of San Francisco, 101 Market Street, MS 1130, San Francisco, CA 94105, firstname.lastname@example.org; Jianjun Miao, Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, 617-353-6675, email@example.com; or Tao Zha, Federal Reserve Bank of Atlanta, Emory University, and NBER, Research Department, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404 498-8353, firstname.lastname@example.org.
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