Heterogeneous beliefs and housing-market boom-bust cycles

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2 Citations (Scopus)

Abstract

This paper presents a business cycle model capturing the stylized features of housing-market boom-bust cycles in developed countries. The model implies that over-optimism of mortgage borrowers generates housing-market boom-bust cycles, if mortgage borrowers are credit-constrained and savers do not share their optimism. This result holds without price stickiness. If price stickiness is introduced into the model, then the model replicates a low policy interest rate during a housing boom as an endogenous reaction to a low inflation rate, given a Taylor rule. Thus, monetary easing observed during housing booms are consistent with the presence of over-optimism causing boom-bust cycles.

Original languageEnglish
Pages (from-to)735-755
Number of pages21
JournalJournal of Economic Dynamics and Control
Volume37
Issue number4
DOIs
Publication statusPublished - 2013 Apr

Keywords

  • Asset price bubbles
  • Credit constraints
  • Financial liberalization
  • House prices
  • Monetary policy

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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