Macroeconomic Models with Heterogeneous Agents and Housing

Karsten Jeske
Economic Review, Vol. 90, No. 4, 2005

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The housing sector's important role in the U.S. economy is hard to miss: Real estate held in household portfolios in 2004 was worth $17 trillion, and the mortgage market now totals more than $7.5 trillion.

To understand how this sector and related government policies affect households and the economy, economists attempt to incorporate housing and housing finance into heterogeneous agent models—macroeconomic models that capture the economic and demographic diversity among households. This article provides a progress report on this line of research via a discussion of four papers, presented at an Atlanta Fed conference in May 2005, that use such models.

The author first presents microlevel data on income, real estate, and mortgage debt across the population. He then outlines a generic model with housing that incorporates the life-cycle pattern. This pattern implies two important features the model must include: the hump-shaped rise and fall in earnings that the average household experiences over time and a realistic life span that captures the different mortality risks among households of different age groups.

The four papers discussed use variations of the basic model to explore the life-cycle behavior of housing versus nonhousing consumption, the effect of house prices changes on the macroeconomy, the effect on households of the availability of different mortgage contracts, and the effect on households of subsidizing mortgage interest rates.

December 2005