Financial and Real Estate Cycles in Business Cycles

Carlos A. Yepezy Brandeis University November 10, 2011

Abstract How do nancial conditions and real estate prices impinge on the business cycle? I develop a general equilibrium model with endogenous leverage and real estate collateral to assess the impact of credit conditions and land prices on aggregate uctuations. I estimate the model using Bayesian estimation techniques to match the observed behavior of a set of macro and nancial variables in the US during the period 19752010. I nd that: 1) Real estate demand and nancial shocks combined explain more than 50 percent of the variability of both macro and nancial variables during the sample period. 2) Technology shocks play a minor role in explaining the behavior of macro variables, and no role in explaining the behavior of nancial variables. Keywords: Financial Frictions, Banking, Housing, Business Cycles. JEL Codes: E21, E22, E32
I thank seminar participants at the 7th Dynare conference, Federal Reserve Bank of Atlanta and the 45th conference of the Canadian Economics Association, Ottawa. All mistakes are my own. A previous version of this paper was titled "Financial Intermediation and Collateral Constraints in Business Cycles". y Brandeis University, International Business School. Email: cyepez@brandeis.edu