In this paper, we formulate and solve a dynamic general equilibrium model of housing investment in which housing investment is lumpy at the household level. The model feature that contributes to making housing investment lumpy are non-convex transaction costs for housing adjustment. In all other respects, our economy is a simple extension of an otherwise standard heterogeneous-agents, incomplete markets, real business cycle model with aggregate and idiosyncratic shocks in the tradition of papers like Krusell and Smith (1998), Chang and Kim (2007), and Silos (2007).
Our main interest is in understanding how the business cycle properties of the model are affected by the presence of housing when housing adjustment becomes lumpy. In broader terms, we study the implications for aggregate dynamics of an economy in which individuals can accumulate assets characterized by di¤erent degrees of liquidity.
The agents of our model can hold two assets: capital and housing. Capital can be easily acquired and sold in the market; instead, houses are assets with a limited amount of liquidity: they can be purchased, accumulated or sold, but only subject to various transaction costs.