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A model of housing and credit cycles with imperfect market knowledge

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  • Kuang, Pei

Abstract

The paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion/contraction. Positive (negative) development in house prices fuels optimism (pessimism) and credit expansion (contraction), which in turn boost (dampen) housing demand and house prices and reinforce agents׳ optimism (pessimism). Bayesian learning about house prices can endogenously generate self-reinforcing booms and busts in house prices and significantly strengthen the role of collateral constraints in aggregate fluctuations. The model can quantitatively account for the 2001–2008 U.S. boom-bust cycle in house prices and associated household debt and consumption dynamics. It also demonstrates that allowing for imperfect knowledge of agents, a higher leveraged economy is more prone to self-reinforcing fluctuations.

Suggested Citation

  • Kuang, Pei, 2014. "A model of housing and credit cycles with imperfect market knowledge," European Economic Review, Elsevier, vol. 70(C), pages 419-437.
  • Handle: RePEc:eee:eecrev:v:70:y:2014:i:c:p:419-437
    DOI: 10.1016/j.euroecorev.2014.06.013
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    3. Pancrazi, Roberto & Pietrunti, Mario, 2019. "Natural expectations and home equity extraction," Journal of Housing Economics, Elsevier, vol. 46(C).
    4. Caines, Colin, 2020. "Can learning explain boom-bust cycles in asset prices? An application to the US housing boom," Journal of Macroeconomics, Elsevier, vol. 66(C).
    5. Yongheng Deng & Eric Girardin & Roselyne Joyeux, 2015. "Fundamentals and the Volatility of Real Estate Prices in China: A Sequential Modelling Strategy," Working Papers 222015, Hong Kong Institute for Monetary Research.
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    7. Martijn (M.I.) Droes & Boris Ziermans & Philip Koppels, 2017. "Information Asymmetry, Lease Incentives, and the Role of Advisors in the Market for Commercial Real Estate," Tinbergen Institute Discussion Papers 17-106/IV, Tinbergen Institute.
    8. Margaret Jacobson, 2019. "Beliefs, Aggregate Risk, and the U.S. Housing Boom," 2019 Meeting Papers 1549, Society for Economic Dynamics.
    9. Pauline Gandré, 2020. "Learning, house prices and macro-financial linkages," EconomiX Working Papers 2020-10, University of Paris Nanterre, EconomiX.
    10. Pei Kuang & Tong Wang, 2017. "Labor Market Dynamics With Search Frictions And Fair Wage Considerations," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1336-1349, July.
    11. Martijn I. Dröes & Marc K. Francke, 2018. "What Causes the Positive Price-Turnover Correlation in European Housing Markets?," The Journal of Real Estate Finance and Economics, Springer, vol. 57(4), pages 618-646, November.
    12. Francisco Camões & Sofia Vale, 2020. "I feel wealthy: A major determinant of Portuguese households’ indebtedness?," Empirical Economics, Springer, vol. 58(4), pages 1953-1978, April.
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    14. Ma, Qiang & Khan, Zeeshan & Chen, Fuzhong & Murshed, Muntasir & Siqun, Yang & Kirikkaleli, Dervis, 2023. "Revisiting the nexus between house pricing and money demand: Power spectrum and wavelet coherence based approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 266-274.
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    18. Natalia S. Nikitina, 2022. "Прогнозирование Индекса Цен На Недвижимость В России," Russian Economic Development (in Russian), Gaidar Institute for Economic Policy, issue 6, pages 23-28, June.
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    More about this item

    Keywords

    Boom-bust; Collateral constraints; Learning; Leverage; Housing;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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