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Betting the house

Listed author(s):
  • Jordà, Òscar
  • Schularick, Moritz
  • Taylor, Alan M.

Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices' bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022199614001561
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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 96 (2015)
Issue (Month): S1 ()
Pages: 2-18

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Handle: RePEc:eee:inecon:v:96:y:2015:i:s1:p:s2-s18
DOI: 10.1016/j.jinteco.2014.12.011
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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