Was Housing to Blame? A DSGE Analysis of the Great Recession

Author (Your Name)

Justin Swansburg, Colby College

Date of Award

2014

Document Type

Honors Thesis (Colby Access Only)

Department

Colby College. Economics Dept.

Advisor(s)

Michael Donihue

Second Advisor

David W. Findlay

Abstract

During the Great Recession both the stock and housing markets experienced a precipitous crash in prices. To quantitatively determine the extent this price collapse contributed to the recession, I construct a New Keynesian dynamic stochastic general equilibrium model that includes an Euler equation directly linked to price shocks. This model traces the results of 22 endogenous variables as they periodically respond to 6 exogenous shocks. The Federal Reserve increasingly relies on these dynamic types of models to decide the optimal course of monetary policy. Pre-recessionary models, however, generally lacked sufficient financial frictions to predict financially fueled recessions. I argue that by endogenously incorporating stock and housing prices, my model will be better equipped to forecast future recessions. My results estimate that the drop in housing prices between 2008-2009 accounted for roughly half of the percentage decline in output over the same time period, while the drop in the stock market had a limited, if not negligible, effect.

Comments

Full-text download is restricted to Colby College.

Keywords

Keynesian, Great Recession, U.S.

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