Housing and business cycles in Korea: A multi-sector Bayesian DSGE approach

The Korean housing market showed booms in the early 2000s and sharp fluctuations after the U.S. financial crisis. The recent increase in volatility in the housing market has motivated greater attention to the relationship between the housing market and the Korean economy. This paper develops a dynamic stochastic general equilibrium (DSGE) model with the housing construction sector and analyzes the role of housing in the Korean business cycles. The results indicate that the model incorporating the collateral role of houses in conjunction with predetermined pricing in the housing construction sector provides a reasonably good fit to the data. In addition, the paper conducts policy simulations of a changing loan-to-value (LTV) ratio ceiling and finds its significant effects on financially constrained households' consumption.