Housing, Portfolio Choice, and the Macroeconomy

Pedro Silos
Working Paper 2005-21
August 2005

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Much of the macroeconomics literature dealing with wealth distribution has abstracted from modeling housing explicitly. This paper investigates the properties of the wealth distribution and the portfolio composition regarding housing and equity holdings and their relationship to macroeconomic shocks. To this end, I construct a business cycle model in which agents differ in age, income, and wealth and derive utility from housing services. The model is consistent with several facts such as the life-cycle pattern of housing-to-wealth ratios, the larger degree of concentration for nonhousing wealth, and the smaller weight of housing in richer households’ portfolios as well as the larger housing-to-wealth ratios in recessions. In addition, the model delivers the familiar business-cycle moments regarding relative standard deviations and procyclicality of consumption, investment, and employment.

JEL classification: E21, E32, G11

Key words: heterogeneity, business cycles, life cycle

This paper is part of my Ph.D. dissertation, completed while I was at the University of Iowa. I would like to thank Beth Ingram, Paul Weller, Steve Williamson, and especially B. Ravikumar and Charles Whiteman for their help. I have also benefited from comments of seminar participants at the Atlanta Fed, Banco de España, Rutgers University, Universidad Carlos III, Universidad de Navarra, Universitat Autonoma de Barcelona, Universite de Montreal, University of Calgary, and University of Notre Dame. The views expressed here are the author’s and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author’s responsibility.

Please address questions regarding content to Pedro Silos, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St. N.E., 30309-4470, 404-498-8630 (phone), 404-498-8956 (fax), Pedro.Silos@atl.frb.org.