RDP 2018-04: DSGE Reno: Adding a Housing Block to a Small Open Economy Model 7. Conclusion

Motivated by the recent increase in housing investment, we extend the DSGE model constructed by RSH to include a standalone housing sector. In doing so, we outline a simple way to incorporate a housing sector into a multi-sector DSGE model that has several appealing features, including its focus on modelling housing services (which have a large weight in GDP and the CPI basket). Moreover, we show that it can qualitatively match a number of the predictions of more complicated models with heterogeneous agents and borrowing.

Our new model provides predictions that are broadly consistent with those from RSH. However, using impulse response analysis we have shown how the propagation of key macroeconomic shocks has changed in the housing-augmented model. In particular, housing investment is more responsive to monetary policy shocks than is other investment. As discussed, this is due in part to calibration choices and in part to our utility specification, and is consistent with SVAR evidence.

We also show how the new model can be used for the exploration of housing-related scenarios, such as examining the drivers of housing investment since the end of the mining boom. The ability to use the model for such analyses means that it constitutes a useful addition to the Bank's suite of models.