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What causes housing bubbles? A theoretical and empirical inquiry

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  • Heike Joebges
  • Sebastian Dullien
  • Alejandro Márquez-Velázquez

Abstract

The paper investigates in how far lax monetary policy (defined as deviations fromprescriptive monetary policy rules or past trends) and/or financial innovation can be seenas a cause for housing price bubbles in industrialized countries. From a theoreticalperspective, it is found that there are hardly any clearly formulated economic models whichassign a role to lax monetary policy in bubble formation, while there are a number ofmodels which assign a role to financial innovation or liberalization. In the empirical part,the paper first presents cross-country-time-series SUR regressions for a sample of 16industrialized countries. According to the results, there is no robust, significant role for therelevance of loose monetary policy, measured by deviations from the Taylor rule. Instead,deviations from the past trend of the real policy rate affect housing prices, but the size ofthe effect depends on the regulation and development of the financial sector. In a thirdstep, three case studies of the United States, Austria and the United Kingdom arepresented, representing countries which have experienced a) lax monetary policy and abubble b) lax monetary policy without a bubble and c) no deviation from the Taylor ruleand a bubble. The case studies hint that specific changes in regulations played a role forthe emergence or absence of bubbles, yet these regulations might not be appropriatelycovered by standard quantitative indicators for financial market (de-)regulation.

Suggested Citation

  • Heike Joebges & Sebastian Dullien & Alejandro Márquez-Velázquez, 2015. "What causes housing bubbles? A theoretical and empirical inquiry," Competence Centre on Money, Trade, Finance and Development 1501, Hochschule fuer Technik und Wirtschaft, Berlin.
  • Handle: RePEc:mtf:wpaper:1501
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    References listed on IDEAS

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    Cited by:

    1. repec:eur:ejmsjr:281 is not listed on IDEAS
    2. Liu, Chunping & Ou, Zhirong, 2017. "What determines China's housing price dynamics? New evidence from a DSGE-VAR," Cardiff Economics Working Papers E2017/4, Cardiff University, Cardiff Business School, Economics Section.
    3. Thomas Theobald & Silke Tober & Emanuel List, 2015. "Finanzmarktstabilität in Zeiten unkonventioneller Geldpolitik," IMK Report 107-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

    More about this item

    Keywords

    working paper; finance-and-trade; House prices; monetary policy; asset price bubbles; financial regulation;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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