Brian Peterson~Department of Economics

		Brian M Peterson
		Assistant Professor
		Indiana University, Department of Economics
		Ph.D. University of Pennsylvania 2001
		Phone: 812-855-4828
		Office: 303 Wylie Hall
		Email: bripeter at indiana dot edu
		Curriculum Vitae

Housing Beveridge: My blog covering the micro-foundations of Housing and the Macroeconomy

Research:

My research covers the micro-foundations of Housing and the Macroeconomy. Currently, my work focuses on the effects of search frictions on the business cycle behavior of the housing market. In addition to search I analyze the housing market using quantitative heterogeneous agent models and simple models of debt contracting.

SPECIAL: Spring 2010 Econ 390: Topics in Macroeconomics

This is new course, subtitled; "Contemporary Macroeconomics and the Great Recession." A summary can be read here.

RESEARCH PAPERS

The Beveridge Curve in the Housing Market: Supply and Disequilibrium (updated 6/26/09)

There is a long-run `Beveridge Curve' in the Housing market given by the negative relationship between the vacancy rate of housing and the rate of household formation. This is true in the owner-occupied market, the rental market, and the total market for housing irrespective of ownership status. The Beveridge Curve represents a long-run supply condition that can be explained by assuming that (1) the cost to produce a new house is decreasing in the growth rate of the housing stock and (2) the probability to sell a new house is decreasing in the vacancy rate. Short-run deviations from the Beveridge curve represent a measurement of oversupply. Using a years of supply metric, for the total housing market irrespective of ownership, in 2007-2008 there were 0.995 years of supply, more than three times the previous peak of 0.285 years of supply in 1973-1974. Comparing the rental market to the owner-occupied market, oversupply generally shows up in the rental market, not the owner-occupied market and the oversupply in the rental market is twice as volatile as oversupply in the owner-occupied market, implying that a large part of the market adjustment to housing supply occurs in the rental market. Interestingly two-thirds of the oversupply in 2007-2008 resided in the rental market as opposed to the owner-occupied market. Using FHFA data for house prices, 46% of the movements in oversupply in the owner-occupied market since 1975 can be explained by house price movements. The last result suggests that at short horizons (4-6 years) house prices are not determined by supply. Rather, house prices drive supply at short time horizons, permitting bubbles and oversupplies of housing to form.

PDF SLIDES Slides of an earlier version of the paper, less academic, doing simple point estimates and an ad-hoc use of the HP Filter. Forecasters and non-academics may find this more interesting than the paper. The results are basically the same as the academic paper.

Fooled by Search: Housing Prices, Turnover and Bubbles (updated 2/11/09)

Theory predicts that the effects of search frictions on house prices from temporary movements in demand should be temporary, while the data suggests it is permanent. The latter implies that movements in demand coupled with search frictions create higher volatility in prices than theory would predict, amplifying price changes, leading to bubbles and depressions. To generate permanent price changes from temporary demand shocks, a textbook search model is combined with a behavioral assumption where house buyers and sellers ignore the effects of search frictions on past prices. The estimated model implies that over half of the real price growth from the housing bubble starting in 1998 is due to the behavioral assumption where households are `Fooled by Search.' When trend growth of prices is removed, the behavioral assumption explains almost three-fourths of the housing bubble.

The estimated model also provides several other results. (1) There is a large inefficiency in the search process of the housing market: buyers have very little bargaining power relative to their impact on creating sales, \emph{i.e.} the Hosios condition is not met by an order of magnitude. (2) There is evidence of a rise in the fundamental value of houses from 1998 to 2005 that mirrors the loose monetary policy under the Greenspan Federal Reserve. (3) Analysis of the boom and bust of the housing market from 1975 to 1982 suggests that buyers who are choosing to \emph{not} enter the housing market are rational. Using the last observation to make a back of the envelope projection for the current crisis, turnover will have to fall to its 1982 level and remain there until 2011 before a recovery can begin, driving house prices down to their real levels of 2002-2003.

PDF SLIDES

PDF SUMMARY OF BUBBLE AND SEARCH FRICTIONS

Partial Commitment and Optimal Default Penalties for Unsecured Non-Contingent Debt (updated 9/17/07)

Joint with Tilman Klumpp of Emory University

Perfect commitment to not sign future contracts after default by one of the contracting parties minimizes the probability of default. However, less-than-perfect commitment may be preferable if the long-term gains from contracting are to be maximized. We characterize the optimal default penalty in a model of unsecured lending. In the case of long-run average payoffs, we show that the optimal penalty is strictly weaker than permanent autarky, unless permanent autarky results in a default probability of exactly zero. In the case of discounted payoffs, we show that if the borrower is sufficiently impatient and the lender is sufficiently patient, the optimal penalty is also strictly weaker than permanent autarky. Our simple model allows us to endogenize the penalty for default, which is taken as exogenous in previous quantitative work.

PDF SLIDES FROM 2006 MIDWEST MACRO

Aggregate Uncertainty, Individual Uncertainty and Illiquidity: Housing and the Business Cycle

Revise and Resubmit at Review of Economic Dynamics

This paper shows that uninsurable countercyclical earnings uncertainty, higher uncertainty in recessions, has a quantitatively large effect on the cyclical behavior of the housing market if housing assets are illiquid. This contrasts earlier work where countercyclical earnings uncertainty has been shown to have a quantitatively small effect on the business cycle, see Krusell and Smith (1998). To understand the mechanism, an individual contemplating the purchase of a home might delay the purchase when a recession hits, since earnings uncertainty rises. This is because the individual does not want to buy a home and then be forced to sell at a loss if he receives a negative income shock. In a model calibrated to the post World War II United States, when housing is liquid (no transaction cost), a 30% increase in earnings uncertainty in recessions causes the median home buyer to delay the purchase of a home by accumulating additional assets equal to 1.1% of average quarterly income. However, when there is a 5% transaction cost to buy and sell a home, the same 30% increase in earnings uncertainty results in the median home buyer accumulating an additional 17.4% of average quarterly income. In the aggregate, the combination of earnings uncertainty and illiquid housing has a quantitatively significant impact on the cyclicality of housing starts. Furthermore, the results are consistent with housing starts leading output across the business cycle, something that the standard Real Business Cycle model with housing has difficulties in explaining.

Discussion of "Housing and the Macroeconomy: The Role of Implicit Guarantees for Government-Sponsored Enterprises," By K. Jeske and D. Krueger

Presented at Atlanta FRB/CAEPR conference on Fiscal Policy and Monetary/Fiscal Policy Interactions, Atlanta FRB April 2007

Money, price dispersion and welfare

Joint with Shouyong Shi at University of Toronto

Published at Economic Theory Nov. 2004, 24: 907-932

We introduce heterogeneous preferences into a tractable model of monetary search to generate price dispersion, and then examine the effects of money growth on price dispersion and welfare. With buyers' search intensity fixed, we find that money growth increases the range of (real) prices and lowers welfare as agents shift more of their consumption to less desirable goods. When buyer's search intensity is endogenous, multiple equilibria are possible. In the equilibrium with the highest welfare level, money growth reduces welfare and increases the range of prices, while having ambiguous effects on search intensity. However, there can be a welfare-inferior equilibrium in which an increase in the money growth rate increases search intensity, increases welfare, and reduces the range of prices.

Endogenous Liquidity and Currency Unions (updated 7/25/08)

Forthcoming, BE Journal of Macroeconomics

This paper extends existing search-theoretic models of monetary exchange, and uses the framework to explore the following applications. First, I show how to endogenize the supply of liquidity in a simple (one-country) model where commodity money can be created, say through mining and minting, and also consumed, say melted or shipped abroad for imported goods. Second, I develop an explicit multi-country version of the model that determines how liquidity is allocated across economies that share the same currency, such as the euro-zone. The implications of the analysis are similar on many dimensions to more traditional theories, such as Hume's price-specie flow theory, or Mundell's monetary theory of the current account. However, in the current framework the role for money has explicit microfoundations based on frictions in the trading process. At the same time, as compared to existing search-based models in monetary economics, especially those used to address international issues, the current framework is much more natural and also much more tractable.

Intensive and Extensive Effects of Money in Search Models of Indivisible Money

Working Paper

This paper shows that the link between the intensive margin of trade and the money supply in standard search models of indivisible money is not due to the indivisibility of money, but rather due to the assumptions on the matching technology. Standard search models of indivisible money assume that all agents search regardless of an agent's money holdings, so that the supply of money determines the ratio of buyers to sellers, or market tightness. In contrast, this paper modifies the matching technology along the lines of the labor search literature by assuming that (1) non-money holders decide whether to enter a market as a seller, (2) there is a fixed cost to enter a market as a seller, and (3) there is a constant returns to scale two-sided matching technology between buyers and sellers. With this matching technology, the equilibrium quantity traded per match, the intensive margin, is independent of the money supply whenever a positive measure of non-money holders chooses not to search. Furthermore, the number of trades, the extensive margin, is proportional to the money supply. Therefore, in any equilibrium where some agents are idle, an increase of the money supply raises output without affecting prices, unambiguously raising welfare. Once the supply of idle agents has been exhausted, an increase in the money supply raises welfare if and only if the ratio of buyers to sellers is inefficiently low, possibly due to agents being overly patient.

Back to: IU Econ Dept | Faculty Directory

Department of Economics

Last update: 10/26/09