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The U.S. housing price bubble: Bernanke versus Taylor

Author

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  • Fitwi, Abrar M.
  • Hein, Scott E.
  • Mercer, Jeffrey M.

Abstract

This paper examines the effects of two major macro-economic forces argued by opposing renowned U.S. economists to have contributed most significantly to the U.S. housing price bubble that preceded the recent global financial crisis. The first force examined, as argued by John Taylor, is the Federal Reserve's loose monetary policy stance from 2002 to 2005. The second force examined, as argued by Ben Bernanke, is the substantial global inflow of capital to the U.S. over the same time period. We develop and estimate a reduced form model for U.S. housing prices, and find evidence consistent with both factors’ contributing significantly to the recent macro-housing price behavior in the U.S.

Suggested Citation

  • Fitwi, Abrar M. & Hein, Scott E. & Mercer, Jeffrey M., 2015. "The U.S. housing price bubble: Bernanke versus Taylor," Journal of Economics and Business, Elsevier, vol. 80(C), pages 62-80.
  • Handle: RePEc:eee:jebusi:v:80:y:2015:i:c:p:62-80
    DOI: 10.1016/j.jeconbus.2015.05.001
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    References listed on IDEAS

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    1. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
    2. John B. Taylor, 2007. "Housing and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 463-476.
    3. Kostas Tsatsaronis & Haibin Zhu, 2004. "What drives housing price dynamics: cross-country evidence," BIS Quarterly Review, Bank for International Settlements, March.
    4. Agnello, Luca & Schuknecht, Ludger, 2011. "Booms and busts in housing markets: Determinants and implications," Journal of Housing Economics, Elsevier, vol. 20(3), pages 171-190, September.
    5. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-137, March.
    6. Rudiger Ahrend & Boris Cournède & Robert Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
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    8. William Poole, 2007. "Understanding the Fed," Review, Federal Reserve Bank of St. Louis, issue jan, pages 3-14.
    9. Edward L. Glaeser & Charles G. Nathanson, 2014. "Housing Bubbles," NBER Working Papers 20426, National Bureau of Economic Research, Inc.
    10. Karl E. Case & Robert J. Shiller, 1990. "Forecasting Prices and Excess Returns in the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(3), pages 253-273, September.
    11. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
    12. George A. Kahn, 2010. "Taylor rule deviations and financial imbalances," Economic Review, Federal Reserve Bank of Kansas City, issue qii, pages 63-99.
    13. John B. Taylor, 2009. "Getting Off Track - How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Books, Hoover Institution, Stanford University, number 3.
    14. Ahrend, Rudiger, 2010. "Monetary ease: A factor behind financial crises? Some evidence from OECD countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-30.
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    Cited by:

    1. Doko Tchatoka, Firmin & Groshenny, Nicolas & Haque, Qazi & Weder, Mark, 2017. "Monetary policy and indeterminacy after the 2001 slump," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 83-95.

    More about this item

    Keywords

    Monetary policy; Taylor rule deviations; Bernanke; International capital inflows; U.S. housing prices; Financial crisis; Macro-economic forces;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F00 - International Economics - - General - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F39 - International Economics - - International Finance - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General

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