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Chung, Keunsuk
School of Business Administration
Research Interests
  • International Macroeconomics
  • Economic Growth
  • International Capital Flows

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Regime switching and the (in)stability of the price-rent relationship: evidence from the US

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Title
Regime switching and the (in)stability of the price-rent relationship: evidence from the US
Author
Kim, JangryoulChung, Keunsuk
Issue Date
2014-11
Publisher
ROUTLEDGE JOURNALS
Citation
APPLIED ECONOMICS, v.46, no.33, pp.4041 - 4052
Abstract
Present value models of house prices assert that in the absence of self-fulfilling bubbles, a house price is equal to the present discount value of all future rents, which implies a linear relationship between house price and rent, and hence a stable price-to-rent ratio. Using a Markov switching error correction model, we re-examine this relationship in the US housing market and find two distinctive regimes: one with a long-run relation between house price and rent predicted by the present value models and the other in which the relation is nonlinear. Furthermore, we find evidence that deviations of house prices from the present value models' predictions are caused by the overreaction of house prices to movements in rents rather than speculative bubbles attributable to extraneous factors.
URI
https://scholarworks.unist.ac.kr/handle/201301/5641
URL
http://www.scopus.com/inward/record.url?partnerID=HzOxMe3b&scp=84906184111
DOI
10.1080/00036846.2014.950793
ISSN
0003-6846
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