Three Essays on the Housing Market and Financial Intermediaries

Abstract

My dissertation utilizes the valuable information present in forward looking financial intermediaries and effects of the housing market on macroeconomy. In the second chapter, I study the dynamic relationship in the shadow banking system. Particularly, I investigate theshort-runandthelong-runrelationshipamongthefinancialassetsofthemoneymarket funds, the commercial paper, and the repurchase agreement markets by undertaking a cointegration analysis of quarterly data over the 1985-2013 period. The evidence suggests that there exists a common long-term cointegrating trend among these three components of the shadow banking system. Any disequilibrium in this long-run relationship among these variables is corrected by movement in the financial assets of the money market funds. The Beveridge-Nelson decomposition from the estimated cointegrating relationship shows that the cyclical component in the money market funds is large and captures the huge swings in these markets during the financial crisis. My results are also robust to the exclusion of the financial crisis, and it reveals the changing role of the commercial paper and the repurchase agreement market in the shadow banking system. The third chapter of my dissertation examines the impact of housing price shocks on tradable and non-tradable employment in the U.S. states over 2001-2014 period. For this purpose, I use a multivariate structural VAR model with a gnostic identification as proposed by Uhlig (2005). This method imposes sign restrictions on some variables in the VAR system but does not restrict the response of employment. I find significant response of employment to house price shocks, with non-tradable employment being more responsive than tradable employment on average. My findings also suggest that the employment response to house price shock is very persistent across states. There is also significant heterogeneity in the persistence as well as the magnitude of response across different states with states with most volatile housing market responding more to the house price shocks. In the fourth chapter, I apply the present value model to explain the movements in house price-income ratio in OECD countries over the period 1975-2015. Using state space model, we decompose the movements in price-income ratio into expected housing return and expected income growth since price-income ratio is a forward looking variable. The evidence suggests that both expected income growth and expected housing price growth are significant in explaining movements in the price-income ratio, while there is a heterogeneity among all countries. I find a positive correlation between expected income growth and expected housing returns. The variance decomposition of the present value of price-income ratios shows that the most variation in the present-value component is explained in the housing return.