Question about the model of Iacoviello and Neri(2010)?

General DSGE Modeling
1

Dear Professor Pfeifer,

When I was replicating the code of Iacoviello(2005), I find something that confused me.

It’s the Euler equation of housing demand which is almostly written as:
image

In this equation, j(t) represnets the housing demand shock and q(t) represnets the house price.

I do not quite understand why the house price rises after a positive housing demand shock form this Euler equation although it’s confirmed to the economic intuition of course. How does the positive housing demand shock translate to the variable of house price?

Any reply will be appreciated. Thank you very much !

2

What do you mean? A positive shock to housing demand increases demand for a given stock of housing supply. As a result, the price must rise in order to clear the market.