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Quantifying Macroeconomic Impact of Housing Demand Shock in Korea
Journal of Insurance and Finance
2020, 31(2),
pp.25-58
DOI :10.23842/jif.2020.31.2.002
Publisher : Korea Insurance Research Institute
Research Area : Business Management
DOI :10.23842/jif.2020.31.2.002
Publisher : Korea Insurance Research Institute
Research Area : Business Management
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Korean small businesses’ heavy reliance on business loans collateralized by their real estate suggests the vulnerability of SMEs to housing market fluctuations. To quantify the impact of housing price changes in response to housing demand shocks on the small business sector and the aggregate economy, this paper presents a heterogenous-agents model characterized by households’ choices on housing (to buy or sell) and occupation (to be a worker or an entrepreneur) and an incomplete financial market. The model is calibrated to match salient features of the 2018 Korean economy. The model experiment reveals that a drop in housing price lowers the upper limit of collateralized loan for small businesses. It impedes their optimal production decisions and results in production contraction. The consequential decline in labor demand lowers wage, inducing a slight rise in the output of large firms. The amount of increase in the output of large firms; however, falls short of making up for the amount of decrease in the output of small businesses so that the overall GDP of the economy decreases.
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