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A mechanism for booms and busts in housing prices

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  • Hillebrand, Marten
  • Kikuchi, Tomoo

Abstract

We study an exchange economy with overlapping generations of consumers who derive utility from consuming a non-durable commodity and housing. A banking sector offers loans to finance housing. We provide a complete characterization of the equilibrium dynamics which alternates between an expansive regime where housing prices increase and banks expand loans and a contractive regime associated with decreasing housing values and shrinking credit volume. Regime switches occur even under small but persistent income changes giving rise to large and recurrent booms and busts in housing prices not reflecting changes in fundamentals. --

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Bibliographic Info

Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 40.

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Date of creation: 2012
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Handle: RePEc:zbw:kitwps:40

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Web page: http://www.wiwi.kit.edu/
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Keywords: OLG; Housing prices; Credit volume; Boom-bust scenarios; Regime switching;

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  1. Céline Rochon & Herakles Polemarchakis, 2006. "Debt, liquidity and dynamics," Economic Theory, Springer, vol. 27(1), pages 179-211, 01.
  2. Farhi, Emmanuel & Tirole, Jean, 2009. "Bubbly Liquidity," TSE Working Papers 09-101, Toulouse School of Economics (TSE), revised Feb 2011.
  3. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
  4. Herakles Polemarchakis, 2001. "Debt, liquidity and dynamics," Working Papers 2001-22, Brown University, Department of Economics.
  5. Patrick Bajari & Phoebe Chan & Dirk Krueger & Daniel Miller, 2013. "A Dynamic Model Of Housing Demand: Estimation And Policy Implications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 409-442, 05.
  6. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  7. Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc.
  8. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  9. Michel, Philippe & Wigniolle, Bertrand, 2003. "Temporary bubbles," Journal of Economic Theory, Elsevier, vol. 112(1), pages 173-183, September.
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