Permanent and transitory income in models of housing demand |
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| Affiliation: | 1. Department of Public Policy, University of Connecticut, 1800 Asylum Ave. West Hartford, CT 06117, United Statesn;2. Department of Economics, University of Richmond, Richmond, VA 23173, United Statesn;1. Guanghua School of Management and IEPR, Peking University, Beijing 100871, China;2. School of Economics, Fudan University, No. 600 Guoquan Road, Shanghai 200433, China;1. Maxwell School, Syracuse University, Syracuse, NY 13244, United States;2. Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106, United States;3. Geography Department, The Ohio State University, Columbus OH 43210, United States;4. Department of Electrical and Systems Engineering, University of Pennsylvania, Philadelphia, PA 19104, United States;1. Department of Economics and Center for Regional Economic Development, University of Bern, Schanzeneckstrasse 1, Bern 3001, Switzerland;2. CEMFI, Casado del Alisal 5, Madrid 28014, Spain;3. Department of Economics, Universitat de Barcelona and IEB, 1-11 John M Keynes, Barcelona 08034, Spain |
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| Abstract: | Permanent income has for some time been recognized as the appropriate income variable for models of housing demand. This paper examines a recently developed model wherein permanent and transitory income are considered to be the fitted and residual components, respectively, of a regression of actual income on several household characteristics. An important caveat for these models is pointed out. One logical remedial strategy is shown to result in underidentification for the coefficient on permanent income. However, the technique uncovers a tangential result which summarizes why an alternative class of models can be expected to underestimate income elasticities. |
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