Page 54 - IJPS-11-1

International Journal of
Population Studies Macroeconomic factors and housing dynamics

(Aoki et al., 2004) and over 30% of household assets in and demand within a framework that includes transaction
the U.S. (Causa et al., 2019). Furthermore, social security costs and credit constraints. This frictional housing market
has garnered substantial attention from researchers and setup is designed to minimize real estate speculation. The
policymakers due to factors such as population aging, economy operates under a Pay-As-You-Go (PAYG) system,
declining fertility rates, and increasing life expectancy. with households retiring exogenously upon reaching the
In addition, as the fertility rate continues to decline, the designated retirement age.
concerns about the social security shortage encourage To accurately reflect the U.S. economy, the model
policymakers to implement retirement policy reform. is calibrated to the U.S. Bureau of Economic Analysis
These situations motivate us to investigate the effects of (BEA), Bureau of Labor Statistics (BLS), Federal Housing
these macroeconomic factors on the housing market and Finance Agency (FHFA), and National Income and
households’ lifecycle choices. Product Accounts (NIPA) data between 1968 and 2018.

This paper mainly addresses two questions: (i) how The calibration method follows established practices
the demographic changes, technological growth, and in previous literature and is consistent with findings in
retirement policy reform impact the housing price and previous empirical analyses. After calibration, we solve the
individual optimal choices and (ii) how these factors model numerically using the backward induction method
influence the macroeconomic variables such as gross and analyze the simulation results. The analysis includes
domestic product (GDP) and the labor market. conducting various counterfactual experiments to assess
This paper aims to tackle these economic inquiries the impacts of demographic changes and technological
through the construction of a comprehensive model, growth and comparing simulation outcomes across
which features a two-sector general equilibrium life- different scenarios.
cycle setup with distinctive attributes: an endogenous The influence of the housing market on the
frictional housing market and a flexible labor market. macroeconomy has long been a subject of intense scrutiny
The structural model applied in this paper is similar to among researchers. For instance, Xu (2013) investigated
that of Favilukis et al. (2017), which provides a two-sector the roles of mortgage innovation and interest rates in
theoretical model with multiple financial assets, and that driving this increase. There is a consensus that the financial
of Chen (2010), which solves a life-cycle optimization market plays a pivotal role in shaping house prices. Ng
problem with social security reform. Their work mainly (2015) explored the contributions of housing preference
focused on factors that drive the house price to fluctuate shocks and monetary policy to house prices. Campbell and
and individual consumption and savings behaviors. Hercowitz (2006) focused on the interaction between debt
Favilukis et al. (2017) mainly examined the effects of the and the macroeconomy. Developing an incomplete market
financial market on the housing market. They found that model, Zhao (2018) examined the impact of housing assets
the relaxation of financing constraints and decline in the on retirement choices and consumption among the elderly,
housing risk premium primarily account for the house finding that the wealth effect of housing prices decreases
price boom. This conclusion is consistent with the findings labor participation and boosts consumption. Other factors
of Xu (2013) and Liu (2023) that mortgage debt innovation such as environmental information (Wang and Yao, 2024),
and low interest rates significantly account for over 50% health shocks (D’Lima et al., 2021), and market rate (Mast,
of the increase in house prices. With a focus on the effects 2023) are also examined.
of social security reform, Chen (2010) found that both The determinants of social security have attracted
housing quantities and homeownership rates respond the attention of numerous researchers. French (2005)
strongly to eliminating social security. Without a social developed the first theoretical model with endogenous
security system, household’s financial assets and housing retirement choice and found that the tax structure of
assets increase rapidly. pensions plays an important role in retirement behavior.
Specifically, to examine the impacts on macroeconomic By building a stochastic overlapping generation general
variables such as GDP and the housing market, we equilibrium model featuring both wage and asset price
incorporate two production sectors: the non-durable shocks faced by households, Glover et al. (2020) found that
goods sector and the durable (housing) goods sector. Both a simulated recession can lead to a huge welfare loss of up
sectors use Cobb–Douglas production functions, with to 10% lifetime consumption. The implications of PAYG on
durable goods production requiring land, labor, and capital the birth rate and GDP per capita were examined using an
as inputs. A flexible labor market allows workers to move overlapping generation model built by Chen and Miyazaki
freely between the two sectors. In the housing market, (2022). Cipriani and Pascucci (2020) and Cipriani and
prices are determined endogenously by aggregate supply Fioroni (2022) investigated the interactions between

Volume 11 Issue 1 (2025) 48 https://doi.org/10.36922/ijps.3645