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Switching error-correction models of house prices in the United Kingdom |
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| Authors: | Stephen Hall Zacharias Psaradakis Martin Sola |
| Institution: | aManagement School, Imperial College of Science, Technology and Medicine, University of London, London, UK;bCentre for Economic, Forecasting London Business School, London, UK;cDepartment of Economics, Birkbeck College, University of London, London, UK |
| Abstract: | This paper develops error-correction models of real house prices in the UK in which the adjustment coefficient switches stochastically between a stable regime where disequilibrium correction takes place and an unstable regime where such a correction does not occur. The generating mechanism of the shifts is modelled as a Markov process with transition probabilities which are either time-invariant or depend on the extent to which the system is out of disequilibrium. Estimation of error-correction models for the UK reveals that the observed booms in real house prices are associated with an unstable regime. We also find that the probability that the system remains in an unstable regime decreases as deviations from equilibrium increase. |
| Keywords: | JEL classification: C5 G1 |
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