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A Model of Housing Boom and Bust in a Small Open Economy

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Author Info
Hajime Tomura

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Abstract

This paper considers a dynamic stochastic general equilibrium model for a small open economy and finds that an improvement in the terms of trade causes a housing boom-bust cycle if the duration of the improvement is uncertain. It is shown that as the economy has better access to the international financial market, the extent of the housing boom and bust gets larger. Also, an increase in the loan-to-value ratio in the domestic mortgage market tends to enhance the extent of the housing boom and bust when the economy has good access to the international financial market.

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File URL: http://www.bankofcanada.ca/en/res/wp/2008/wp08-9.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 08-9.

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Length: 43 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-9

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Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8899
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

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Postal: Publications Distribution, Bank of Canada, 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
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Related research
Keywords: Business fluctuations and cycles; Credit and credit aggregates;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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  1. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February. [Downloadable!] (restricted)
  2. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September. [Downloadable!] (restricted)
  3. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December. [Downloadable!] (restricted)
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  4. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Andrew Benito & Haroon Mumtaz, . "Consumption excess sensitivity, liquidity constraints and the collateral role of housing," Bank of England working papers 306, Bank of England. [Downloadable!]
  6. Thomas Lubik & Wing Teo, 2005. "Do World Shocks Drive Domestic Business Cycles? Some Evidence from Structural Estimation," Economics Working Paper Archive 522, The Johns Hopkins University,Department of Economics. [Downloadable!]
  7. Alessandro Barbarino & Boyan Jovanovic, 2007. "Shakeouts And Market Crashes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 385-420, 05. [Downloadable!] (restricted)
    Other versions:
  8. Morris Davis & Jonathan Heathcote, 2004. "Housing and the business cycle," Finance and Economics Discussion Series 2004-11, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  9. Kohli, Ulrich, 2004. "Real GDP, real domestic income, and terms-of-trade changes," Journal of International Economics, Elsevier, vol. 62(1), pages 83-106, January. [Downloadable!] (restricted)
  10. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
  11. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  12. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June. [Downloadable!]
    Other versions:
  13. Jason Allen & Robert Amano & David P. Byrne & Allen W. Gregory, 2006. "Canadian City Housing Prices and Urban Market Segmentation," Working Papers 06-49, Bank of Canada. [Downloadable!]
  14. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October. [Downloadable!] (restricted)
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  15. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22. [Downloadable!]
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  16. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February. [Downloadable!] (restricted)
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  17. Kose, M. Ayhan, 2002. "Explaining business cycles in small open economies: 'How much do world prices matter?'," Journal of International Economics, Elsevier, vol. 56(2), pages 299-327, March. [Downloadable!] (restricted)
  18. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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