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Betting the house

Listed author(s):
  • Jorda, Oscar

    ()

    (Federal Reserve Bank of San Francisco)

  • Schularick, Moritz

    ()

    (Department of Economics, University of Bonn)

  • Taylor, Alan M.

    ()

    (Department of Economics, University of California,Davis)

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 140 years 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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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2014-28.

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Length: 41 pages
Date of creation: Dec 2014
Handle: RePEc:fip:fedfwp:2014-28
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