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Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Joint adjustment of house prices, stock prices and output towards short run equilibrium

Thomas Grandner () and Dieter Gstach ()
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Thomas Grandner: Department of Economics, Vienna University of Economics & B.A.
Dieter Gstach: Department of Economics, Vienna University of Economics & B.A.

Abstract: A dynamic IS-LM model including stocks and houses as additional assets will be analyzed in this paper. Providing also housing services, a major consumption item for most households, houses create an additional link between the monetary and the real sector of the economy. The adjustment path of output, house prices and stock prices after exogenous policy shocks will be derived within a rational expectation setup. This will show how different reaction patterns of asset prices are related to different elasticities of housing services demand. These general analytical results are contrasted with relevant empirical work, particularly Lastrapes [2002], leading to the identification of plausible elasticity ranges. The particular results for those shed new light upon the ongoing discussion about demand effects from real estate wealth and about determinants of house price fluctuations.

JEL-codes: E44; E52; R21 January 2004

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