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Econometric regime shifts and the US subprime bubble

  • André K. Anundsen

    (Department of Economics, University of Oslo)

Using aggregate quarterly data for the period 1975q1–2010q4, I find that the US housing market changed from a stable regime with prices determined by fundamentals, to a highly unstable regime at the beginning of the previous decade. My results indicate that these imbalances could have been detected with the aid of real time econometric modeling and that they were caused by the sharp rise in subprime lending in the early to mid 2000s. These results are based on the detection of huge parameter non-constancies and a loss of equilibrium correction in two theory derived cointegrating relationships shown to be very stable for earlier periods. Controlling for the increased subprime exposure during this period, enables me to reestablish the pre-break relationships also for the full sample. This suggests that the US housing bubble was caused by the increased borrowing to a more risky segment of the market, which may have allowed for a latent frenzy behavior that previously was constrained by the lack of financing. With reference to Stiglitz’s general conception of a bubble, I use the econometric results to construct two bubble indicators, which clearly demonstrate the transition to an unstable regime. Such indicators can be part of an early warning system and are shown to Granger cause a set of coincident indicators and financial (in)stability measures.

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Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 126.

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Length: 39
Date of creation: 2012
Date of revision:
Handle: RePEc:nbp:nbpmis:126
Note: The paper has been presented at the Central Bank Macroeconomic Modeling Workshop: Modeling Imbalances in Warsaw, 13.–14. September 2012.
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  1. Vyacheslav Mikhed & Petr Zemcik, 2007. "Do House Prices Reflect Fundamentals? Aggregate and Panel Data Evidence," CERGE-EI Working Papers wp337, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  2. Muellbauer, J & Murphy, A, 1996. "Booms and Busts in the UK Housing Market," Economics Papers 125, Economics Group, Nuffield College, University of Oxford.
  3. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  4. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
  5. Vyacheslav Mikhed & Petr Zemcik, 2007. "Testing for Bubbles in Housing Markets: A Panel Data Approach," CERGE-EI Working Papers wp338, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  6. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  7. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  8. Jian Zhou, 2010. "Testing for Cointegration between House Prices and Economic Fundamentals," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(4), pages 599-632, Winter.
  9. Vyacheslav Mikhed & Petr Zemčík, 2009. "Testing for Bubbles in Housing Markets: A Panel Data Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 366-386, May.
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