Systemic risk from real estate and macro-prudential regulation
AbstractThere is considerable evidence that boom and bust cycles in real estate are the primary cause of financial crises. This paper develops a model of real estate pricing based on rational behaviour with two regimes. In 'normal times' prices of housing units are determined by the consumers who live in them and are equal to the discounted stream of housing services. In 'boom and bust times' speculators find it profitable to borrow from banks and enter the market. There is an agency problem because banks are unable to fully assess the risk that the speculators are taking and this leads to risk shifting and asset substitution. The result is a bubble in real estate prices in that they are higher than the discounted stream of housing services during the boom phase. This model is then used as the basis for analysing macro-prudential polices designed to prevent the occurrence of such bubbles. These measures include monetary policy, fiscal tools such as real estate transfer taxes, and annual real estate taxes and banking regulation such as restrictions on loan-to-value ratios, countercyclical capital requirements and loan provisions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Inderscience Enterprises Ltd in its journal Int. J. of Banking, Accounting and Finance.
Volume (Year): 5 (2013)
Issue (Month): 1/2 ()
Contact details of provider:
Web page: http://www.inderscience.com/browse/index.php?journalID=277
boom-bust cycles; agency problem; price bubbles; loan restrictions; transfer taxes; systemic risk; real estate taxes; banking regulation; loan-to-value ratios; countercyclical capital requirements; loan provisions; macro-prudential policies; financial crisis; risk assessment; housing bubbles; real estate bubbles.;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number frie63-1.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Quarterly Review, Federal Reserve Bank of Minneapolis,
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
- John R. Conlon, 2004. "Simple Finite Horizon Bubbles Robust to Higher Order Knowledge," Econometrica, Econometric Society, Econometric Society, vol. 72(3), pages 927-936, 05.
- Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006.
"Bubbles and capital flow volatility: Causes and risk management,"
Journal of Monetary Economics, Elsevier,
Elsevier, vol. 53(1), pages 35-53, January.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc.
- Freixas, Xavier & Parigi, Bruno & Rochet, Jean Charles, 1999.
"Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank,"
CEPR Discussion Papers, C.E.P.R. Discussion Papers
2325, C.E.P.R. Discussion Papers.
- Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(3), pages 611-38, August.
- Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 611-640.
- X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued), Netherlands Central Bank 47, Netherlands Central Bank.
- Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic risk, interbank relations and liquidity provision by the Central Bank," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
- Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1163-81, September.
- Englund, Peter & Quigley, John M. & Redfearn, Christian L., 1998. "Improved Price Indexes for Real Estate: Measuring the Course of Swedish Housing Prices," Journal of Urban Economics, Elsevier, vol. 44(2), pages 171-196, September.
- Gary Gorton, 1986.
"Banking panics and business cycles,"
86-9, Federal Reserve Bank of Philadelphia.
- De Long, J Bradford, et al, 1990.
" Positive Feedback Investment Strategies and Destabilizing Rational Speculation,"
Journal of Finance, American Finance Association,
American Finance Association, vol. 45(2), pages 379-95, June.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
- Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999.
"The Twin Crises: The Causes of Banking and Balance-of-Payments Problems,"
American Economic Review, American Economic Association,
American Economic Association, vol. 89(3), pages 473-500, June.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
- Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
- Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, Elsevier, vol. 61(2), pages 206-229, December.
- Poterba, James M, 1984.
"Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach,"
The Quarterly Journal of Economics, MIT Press,
MIT Press, vol. 99(4), pages 729-52, November.
- James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 339, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, Elsevier, vol. 4(4), pages 335-344, December.
- Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 467.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Graham Langley).
If references are entirely missing, you can add them using this form.