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Did the Recent Housing Boom Signal the Global Financial Crisis?

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  • David M. Kemme

    ()
    (Department of Economics, University of Memphis, Memphis, TN 38152, USA)

  • Saktinil Roy

    ()
    (Centre for Finance, Economics and Operations Management, Athabasca University, 22 Sir Winston Churchill Avenue, Suite 301, Saint Albert, AB T8N 1B4, Canada)

Abstract

Shiller's (2005) prediction of the current global crisis followed from two key observations: (i) the recent housing booms in the United States and other advanced countries were not explained by economic fundamentals; and (ii) historically similar financial booms eventually collapsed, leading to recession. This article provides an empirical framework linking Shiller's (2005) observations and crisis prediction. We utilize vector error correction models and panel probit and logit models to show that tracking a single variable, real house prices, was sufficient to predict the current global crisis.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 78 (2012)
Issue (Month): 3 (January)
Pages: 999-1018

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Handle: RePEc:sej:ancoec:v:78:3:y:2012:p:999-1018

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  2. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
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  5. Dean Baker, 2002. "The Run-up in Home Prices: A Bubble," Challenge, M.E. Sharpe, Inc., vol. 45(6), pages 93-119, November.
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  8. 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.
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  13. Douglas W. Diamond & Raghuram G. Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," American Economic Review, American Economic Association, vol. 99(2), pages 606-10, May.
  14. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
  15. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack, 2004. "An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(1), pages 1-32, 03.
  16. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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Cited by:
  1. Grydaki, Maria & Bezemer, Dirk J., 2012. "The Role of Credit in Great Moderation: a Multivariate GARCH Approach," MPRA Paper 39813, University Library of Munich, Germany.
  2. Reinhart, Carmen M. & Rogoff, Kenneth S., 2008. "Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison," Scholarly Articles 11129156, Harvard University Department of Economics.
  3. Grydaki, Maria & Bezemer, Dirk, 2013. "The role of credit in the Great Moderation: A multivariate GARCH approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4615-4626.
  4. Bezemer, Dirk & Grydaki, Maria, 2013. "Debt and the U.S. Great Moderation," MPRA Paper 47399, University Library of Munich, Germany.
  5. Bezemer, Dirk J & Grydaki, Maria, 2012. "Mortgage Lending and the Great moderation: a multivariate GARCH Approach," MPRA Paper 36356, University Library of Munich, Germany.
  6. Grydaki, Maria & Bezemer, Dirk, 2013. "Did Credit Decouple from Output in the Great Moderation?," MPRA Paper 47424, University Library of Munich, Germany.

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