Working Paper: NBER ID: w18276
Authors: S. Boragan Aruoba; Morris A. Davis; Randall Wright
Abstract: We study models incorporating money, household production, and investment in housing. Inflation, as a tax on market activity, encourages substitution into household production, and thus investment in household capital. Hence, inflation increases the (appropriately deflated) value of the housing stock. This is documented in various data sources. A calibrated model accounts for a fifth to a half of the observed relationships. While this leaves much to be explained, it demonstrates the channel is economically relevant. We also show models with home production imply higher costs of inflation than models without it, especially when home and market goods are close substitutes.
Keywords: inflation; housing; household production; monetary economics
JEL Codes: E41; E52; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation (E31) | household production (D13) |
| household production (D13) | value of housing stock (R31) |
| inflation (E31) | value of housing stock (R31) |
| inflation (E31) | nominal interest rates (E43) |
| nominal interest rates (E43) | value of housing stock (R31) |