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Heterogeneous beliefs and housing-market boom-bust cycles

  • Tomura, Hajime

This paper presents a business cycle model capturing the stylized features of housing-market boom-bust cycles in developed countries. The model implies that over-optimism of mortgage borrowers generates housing-market boom-bust cycles, if mortgage borrowers are credit-constrained and savers do not share their optimism. This result holds without price stickiness. If price stickiness is introduced into the model, then the model replicates a low policy interest rate during a housing boom as an endogenous reaction to a low inflation rate, given a Taylor rule. Thus, monetary easing observed during housing booms are consistent with the presence of over-optimism causing boom-bust cycles.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 4 ()
Pages: 735-755

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:4:p:735-755
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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