IDEAS home Printed from https://ideas.repec.org/p/zbw/bofrdp/rdp2012_002.html
   My bibliography  Save this paper

Expectations-driven cycles in the housing market

Author

Listed:
  • Lambertini, Luisa
  • Mendicino, Caterina
  • Punzi, Maria Teresa

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 inflationary shocks that are not fulfilled can also lead to the observed subsequent macroeconomic recession. Investigating the role of the credit market for house market fluctuations 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.

Suggested Citation

  • Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2012. "Expectations-driven cycles in the housing market," Bank of Finland Research Discussion Papers 2/2012, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2012_002
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/212205/1/bof-rdp2012-002.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Floden, Martin, 2006. "Vintage Capital and Expectations Driven Business Cycles," SSE/EFI Working Paper Series in Economics and Finance 643, Stockholm School of Economics.
    2. Jeffrey R. Campbell & Zvi Hercowitz, 2004. "The role of households' collateralized debts in macroeconomic stabilization," Working Paper Series WP-04-24, Federal Reserve Bank of Chicago.
    3. Giovanni Favara & Jean Imbs, 2015. "Credit Supply and the Price of Housing," American Economic Review, American Economic Association, vol. 105(3), pages 958-992, March.
    4. Nutahara, Kengo, 2010. "Internal and external habits and news-driven business cycles," Economics Letters, Elsevier, vol. 107(2), pages 300-303, May.
    5. 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.
    6. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
    7. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, March.
    8. Piazzesi, Monika & Schneider, Martin & Tuzel, Selale, 2007. "Housing, consumption and asset pricing," Journal of Financial Economics, Elsevier, vol. 83(3), pages 531-569, March.
    9. Alan G. Ahearne & John Ammer & Brian M. Doyle & Linda S. Kole & Robert F. Martin, 2005. "Monetary Policy and House Prices: A Cross-Country Study," Working Papers Central Bank of Chile 344, Central Bank of Chile.
    10. Kobayashi, Keiichiro & Nakajima, Tomoyuki & Inaba, Masaru, 2012. "Collateral Constraint And News-Driven Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 16(5), pages 752-776, November.
    11. Monika Piazzesi & Martin Schneider, 2009. "Momentum Traders in the Housing Market: Survey Evidence and a Search Model," American Economic Review, American Economic Association, vol. 99(2), pages 406-411, May.
    12. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 309-327, April.
    13. Beaudry, Paul & Portier, Franck, 2007. "When can changes in expectations cause business cycle fluctuations in neo-classical settings?," Journal of Economic Theory, Elsevier, vol. 135(1), pages 458-477, July.
    14. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-164, April.
    15. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
    16. Silos, Pedro, 2007. "Housing, portfolio choice and the macroeconomy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2774-2801, August.
    17. Bjørnland, Hilde C. & Jacobsen, Dag Henning, 2010. "The role of house prices in the monetary policy transmission mechanism in small open economies," Journal of Financial Stability, Elsevier, vol. 6(4), pages 218-229, December.
    18. Martin Schneider & Monika Piazzesi, 2009. "Momentum traders in a search model of the housing market," 2009 Meeting Papers 1266, Society for Economic Dynamics.
    19. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo & Ilut, Cosmin, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 955, European Central Bank.
    20. Karl Walentin, 2014. "Housing Collateral and the Monetary Transmission Mechanism," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(3), pages 635-668, July.
    21. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. F. Verona & M. M. F. Martins & I. Drumond, 2013. "(Un)anticipated Monetary Policy in a DSGE Model with a Shadow Banking System," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 78-124, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2017. "Expectations-driven cycles in the housing market," Economic Modelling, Elsevier, vol. 60(C), pages 297-312.
    2. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2017. "Expectations-driven cycles in the housing market," Economic Modelling, Elsevier, vol. 60(C), pages 297-312.
    3. repec:zbw:bofrdp:2012_002 is not listed on IDEAS
    4. Sandra Gomes, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
    5. William Gatt, 2018. "Housing boom-bust cycles and asymmetric macroprudential policy," CBM Working Papers WP/02/2018, Central Bank of Malta.
    6. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.
    7. Piazzesi, M. & Schneider, M., 2016. "Housing and Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1547-1640, Elsevier.
    8. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 753-811, Elsevier.
    9. Kobayashi Keiichiro & Nutahara Kengo, 2010. "Nominal Rigidities, News-Driven Business Cycles, and Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-26, September.
    10. Munechika Katayama & Kwang Hwan Kim, 2018. "Intersectoral Labor Immobility, Sectoral Comovement, and News Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(1), pages 77-114, February.
    11. Bauer, Gregory H., 2017. "International house price cycles, monetary policy and credit," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 88-114.
    12. Yu Ren & Yufei Yuan, 2014. "Why the Housing Sector Leads the Whole Economy: The Importance of Collateral Constraints and News Shocks," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 323-341, February.
    13. Kuan‐Jen Chen & Ching‐Chong Lai, 2015. "On‐the‐Job Learning and News‐Driven Business Cycles," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(2-3), pages 261-294, March.
    14. Jianjun Miao & Pengfei Wang & Tao Zha, 2020. "Discount Shock, Price–Rent Dynamics, And The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(3), pages 1229-1252, August.
    15. repec:wyi:journl:002170 is not listed on IDEAS
    16. Gomes, Sandra & Iskrev, Nikolay & Mendicino, Caterina, 2017. "Monetary policy shocks: We got news!," Journal of Economic Dynamics and Control, Elsevier, vol. 74(C), pages 108-128.
    17. Ali, Syed Zahid & Anwar, Sajid, 2018. "Price puzzle in a small open New Keynesian model," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 29-42.
    18. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2011. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 1-29, February.
    19. Christoph Gortz & John D. Tsoukalas, 2013. "Learning, Capital Embodied Technology and Aggregate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 708-723, October.
    20. Guo, Zi-Yi, 2017. "Information heterogeneity, housing dynamics and the business cycle," EconStor Preprints 168561, ZBW - Leibniz Information Centre for Economics.
    21. Pedro Gete, 2015. "Housing demands, savings gluts and current account dynamics," Globalization Institute Working Papers 221, Federal Reserve Bank of Dallas.
    22. Bekiros, Stelios & Nilavongse, Rachatar & Uddin, Gazi Salah, 2020. "Expectation-driven house prices and debt defaults: The effectiveness of monetary and macroprudential policies," Journal of Financial Stability, Elsevier, vol. 49(C).

    More about this item

    Keywords

    boom-bust cycles; credit frictions; housing market;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bofrdp:rdp2012_002. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.