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United in Booms, Divided in Busts: Regional House Price Cycles and Monetary Policy

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  • Ulrich Roschitsch
  • Hannes Twieling

Abstract

This paper shows that regional disparities in house price growth are more pronounced during house price busts than during booms. To explain this observation we construct a two-region currency union model incorporating a housing sector and extrapolative belief updating regarding house prices. To solve the model, we propose a new method that efficiently handles extrapolative belief updating in a wide class of structural models. We show that intensified extrapolation in busts and regional housing market heterogeneities jointly explain elevated regional house price growth dispersion in busts and muted dispersion in booms. Consistent with our theory, we provide empirical evidence that house price belief updating is indeed more pronounced in busts and we document that regional heterogeneities on the housing supply side affect regional house prices. Quantitatively, our model can match empirically observed elevated regional house price growth dispersion in busts. Moreover, we demonstrate that a monetary authority targeting house prices may reduce the volatility of output and prices as well as regional house price growth disparities. This policy is welfare-improving relative to an inflation-targeting benchmark.

Suggested Citation

  • Ulrich Roschitsch & Hannes Twieling, 2025. "United in Booms, Divided in Busts: Regional House Price Cycles and Monetary Policy," Staff Working Papers 25-36, Bank of Canada.
    • Handle: RePEc:bca:bocawp:25-36
    DOI: 10.34989/swp-2025-36
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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