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The changing role of house price dynamics over the business cycle

  • Dufrénot, G.
  • Malik, S.

In this paper, we attempt to analyse the relationship between house price developments and the business cycle. Employing a time-varying transition probability Markov switching framework, we provide empirical evidence that house price growth may prove a useful leading indicator for turning point detection. In focusing on three countries, the US, UK and Spain, we furthermore provide evidence that although potentially informative from an overall perspective in business cycle modelling, the signi.cance of signals contained in house prices may not be symmetric across the identi.ed high growth and low growth states. In addition, we suggest a possible range of values for house price de.ation which may trigger a recession the following period.

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Paper provided by Banque de France in its series Working papers with number 309.

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Length: 22 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bfr:banfra:309
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/

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  1. Charles Goodhart & Boris Hofmann, 2008. "House prices, money, credit, and the�macroeconomy," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 180-205, spring.
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  4. Natalia T. Tamirisa & Alain N. Kabundi & Deniz Igan & Francisco Nadal-De Simone & Marcelo Pinheiro, 2009. "Three Cycles; Housing, Credit, and Real Activity," IMF Working Papers 09/231, International Monetary Fund.
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  14. Miguel Almunia & Agustín Bénétrix & Barry Eichengreen & Kevin H. O'Rourke & Gisela Rua, 2010. "From Great Depression to Great Credit Crisis: similarities, differences and lessons," Economic Policy, CEPR;CES;MSH, vol. 25, pages 219-265, 04.
  15. Nils Jannsen, 2010. "National and International Business Cycle Effects of Housing Crises," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 56(2), pages 175-206.
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  17. Jeremy C. Stein, 1993. "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects," NBER Working Papers 4373, National Bureau of Economic Research, Inc.
  18. Edward E. Leamer, 2007. "Housing IS the Business Cycle," NBER Working Papers 13428, National Bureau of Economic Research, Inc.
  19. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  20. de Bandt, O. & Barhoumi, K. & Bruneau, C., 2010. "The international transmission of house price shocks," Working papers 274, Banque de France.
  21. Clements, Michael P & Krolzig, Hans-Martin, 2003. "Business Cycle Asymmetries: Characterization and Testing Based on Markov-Switching Autoregressions," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 196-211, January.
  22. Daniel E. Sichel, 1989. "Business cycle asymmetry: a deeper look," Working Paper Series / Economic Activity Section 93, Board of Governors of the Federal Reserve System (U.S.).
  23. David Miles & Vladimir Pillonca, 2008. "Financial innovation and European housing and mortgage markets," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 145-175, spring.
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  25. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  26. Luis J. Álvarez & Alberto Cabrero, 2010. "Does housing really lead the business cycle?," Banco de Espa�a Working Papers 1024, Banco de Espa�a.
  27. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  28. Helmut Wagner, 2010. "The causes of the recent financial crisis and the role of central banks in avoiding the next one," International Economics and Economic Policy, Springer, vol. 7(1), pages 63-82, May.
  29. Charles Engel & Craig S. Hakkio, 1994. "The Distribution of Exchange Rates in the EMS," NBER Working Papers 4834, National Bureau of Economic Research, Inc.
  30. Carlos Vargas-Silva, 2007. "Monetary policy and the U.S. housing market: A VAR analysis imposing sign restrictions," Working Papers 0705, Sam Houston State University, Department of Economics and International Business.
  31. Kiefer, Nicholas M, 1980. "A Note on Regime Classification in Disequilibrium Models," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 637-39, April.
  32. Albert, James H & Chib, Siddhartha, 1993. "Bayes Inference via Gibbs Sampling of Autoregressive Time Series Subject to Markov Mean and Variance Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 1-15, January.
  33. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
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