Macroeconomics and housing

Many aspects, both general and detailed, of empirical macroeconomic models used for economic policy analyses fail to match the existing evidence. It is essential to model the key aspects of the interaction between the financial sector and the real economy using flow-of-funds balance sheet data, investigate financial fragility resulting from credit booms and over-valued house prices, while allowing for institutional heterogeneity across countries. We illuminate the roles of housing in the economy, emphasizing the importance of institutional arrangements (differing greatly between economies), and on how changes in house prices and mortgages in turn affect economic outcomes. We have also provided a critique of the mathematical basis of current macroeconomic theory, primarily represented by dynamic stochastic general equilibrium (DSGE) models, demonstrating its invalidity when distributions shift, and hence undermined the theory of so-called `rational expectations’.