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I would like to thank Michael Keen and Ruud De Mooij for suggesting the topic, as well as Ali Alichi, Ravi Balakrishnan, Marialuz Moreno Badia, Vitor Gaspar, Shafik Hebous, Philippe Wingender and seminar participants at IMF’s Fiscal Affairs Department and De Nederlandsche Bank for useful comments and suggestions. The usual disclaimer applies.
Some empirical studies suggest that a significant fall in housing prices is even more important for the economy than an equivalent fall in stock prices (Case et al., 2001).
For instance, the recently created European Systemic Risk Board (ESRB) will be in charge of providing macro prudential policy recommendations in Europe.
The paper does not attempt to assess the extent to which higher house price volatility induced by property taxation can ultimately result in financial instability.
An MSA is a geographical region with a relatively high population density and close economic ties throughout area. Such regions are not legally incorporated (like a city or a town) and not considered legal administrative divisions (like counties). Some MSAs contain more than one large city (e.g., Norfolk-Virginia Beach, Minneapolis-Saint Paul). MSAs are used by the Census Bureau and other federal government agencies for statistical purposes and their definition can vary over time. As of 2014, there have been close to 400 MSAs in the U.S.
This assumption suggests that after a positive demand shock has produced first-round effect on house prices, households may anticipate further price increases. It also implies that property taxes do not directly affect expected house price changes.
Following the established practice for annual series, the smoothing parameter of the HP filter is set to 100.