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Housing Bubbles

  • Óscar Arce
  • David López-Salido

We use the notion of a housing bubble as an equilibrium in which some investors hold houses for resale purposes only and not with the expectation of receiving a dividend, either in the form of rent or utility. We show that an economy with looser collateral constraints is less prone to bubbles, which, in turn, have smaller size, but are more fragile in the face of credit-crunch shocks. Our environment also allows for the existence of pure bubbles on unproductive assets. We find that multiple equilibria, in which the economy moves endogenously from a pure bubble to a housing bubble and vice versa, are possible. (JEL G12, R21, R31)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 1 (January)
Pages: 212-41

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Handle: RePEc:aea:aejmac:v:3:y:2011:i:1:p:212-41
Note: DOI: 10.1257/mac.3.1.212
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