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Expectations-Driven Cycles in the Housing Market

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  • Luisa Lambertini
  • Caterina Mendicino
  • Maria Teresa Punzi

Abstract

Survey data suggests that news of changes in business conditions are significantly related to house prices and consumers' beliefs of favorable buying conditions in the housing market. This paper explores the transmission of "news shocks" as a source of boom-bust cycles in the housing market. News on shocks originated in different sectors of the economy can generate booms in the housing market in accordance with the average behavior in the data; expectations on monetary policy and inf ationary shocks that are not fullled can also lead to the observed subsequent macroeconomic recession. Investigating the role of the credit market for house market f luctuations we find that favorable credit conditions that are expected to be reversed in the near future generate boom-bust cycle dynamics in line with the most recent episode. Further, credit conditions also affect boom-bust cycles generated by news shocks originated in other sectors of the economy. In particular, lower loan-to-value ratios reduce the severity of expectations-driven cycles and the volatility of household debt, aggregate consumption and GDP.

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Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 12/08.

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Handle: RePEc:not:notcfc:12/08

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Keywords: boom-bust cycles; credit frictions; housing market.;

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Citations

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Cited by:
  1. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2011. "Leaning Against Boom-Bust Cycles in Credit and Housing Prices," Working Papers, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne 201101, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised Mar 2011.
  2. Caterina Mendicino & Maria Tereza Punzi, 2011. "Stabilization Policy and Boom-Bust Cycles - Monetary and Macro-Prudential Rules," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  3. Paul Beaudry & Franck Portier, 2014. "News Driven Business Cycles: Insights and Challenges," 2014 Meeting Papers, Society for Economic Dynamics 289, Society for Economic Dynamics.
  4. Verona, Fabio & Martins, Manuel M. F. & Drumond, Inês, 2012. "(Un)anticipated monetary policy in a DSGE model with a shadow banking system," IMFS Working Paper Series, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt 56, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  5. Caterina Mendicino & Maria Teresa Punzi, 2011. "Boom-bust cycles and stabilisation policy - monetary and macroprudential rules: a loss function approach," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 58-65 Bank for International Settlements.
  6. Caterina Mendicino & Maria Tereza Punzi, 2013. "Confidence and economic activity: the case of Portugal," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  7. Jan K. Brueckner & Paul S. Calem & Leonard I. Nakamura, 2011. "Subprime mortgages and the housing bubble," Working Papers 11-12, Federal Reserve Bank of Philadelphia.
  8. Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers, Banco de Portugal, Economics and Research Department w201121, Banco de Portugal, Economics and Research Department.
  9. Jan Bruha & Michal Hlavacek & Lubos Komarek, 2013. "Impacts of housing prices on the financial position of households," Occasional Publications - Chapters in Edited Volumes, Czech National Bank, Research Department, in: CNB Financial Stability Report 2012/2013, chapter 0, pages 120-127 Czech National Bank, Research Department.
  10. Caterina Mendicino, 2009. "Monetary Policy Expectations and Boom-Bust Cycles in the Housing Market," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.

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