Heterogeneous Beliefs and Housing-Market Boom-Bust Cycles in a Small Open Economy
AbstractThis paper introduces heterogeneous beliefs among households in a small open economy model for the Canadian economy. The model suggests that simultaneous boom-bust cycles in house prices, output, investment, consumption and hours worked emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. With sticky prices and a standard monetary policy rule, the model shows that the nominal policy interest rate and the CPI inflation rate decline during housing booms and rise as house prices fall. These results replicate the stylized features of housing-market boom-bust cycles in industrialized countries. Policy experiments demonstrate that stronger policy responses to inflation amplify housing-market boom-bust cycles. Also, higher loan-to-value ratios amplify housing-market boom-bust cycles by encouraging speculative housing investments by mortgage borrowers during housing booms and increasing liquidation of housing collateral during housing busts.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 09-15.
Length: 58 pages
Date of creation: 2009
Date of revision:
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Credit and credit aggregates; Financial stability; Inflation targets;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-10 (All new papers)
- NEP-CBA-2009-06-10 (Central Banking)
- NEP-DGE-2009-06-10 (Dynamic General Equilibrium)
- NEP-MAC-2009-06-10 (Macroeconomics)
- NEP-OPM-2009-06-10 (Open Economy Macroeconomics)
- NEP-URE-2009-06-10 (Urban & Real Estate Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Housing market boom-bust cycles and monetary policy
by Economic Logician in Economic Logic on 2009-06-30 08:12:00
- Badarinza, Cristian & Buchmann, Marco, 2011. "Macroeconomic vulnerability and disagreement in expectations," Working Paper Series 1407, European Central Bank.
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