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House Price Booms and the Current Account

  • Klaus Adam
  • Pei Kuang
  • Albert Marcet

A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years 2001-2008. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes' rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals, so that low interest rates can fuel a house price boom. House price booms, however, are not necessarily synchronized across countries and the model is consistent with the heterogeneous response of house prices across the G7 following the reduction in real interest rates at the beginning of the millennium. The response to interest rates depends sensitively on agents' beliefs at the time of the interest rate reduction, which in turn are a function of the country specific history prior to the year 2000. According to the model, the US house price boom could have been largely avoided, if real interest rates had decreased by less after the year 2000.

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File URL: http://www.nber.org/papers/w17224.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17224.

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Date of creation: Jul 2011
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Publication status: published as Klaus Adam & Pei Kuang & Albert Marcet, 2012. "House Price Booms and the Current Account," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 77 - 122.
Handle: RePEc:nbr:nberwo:17224
Note: AP IFM
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  1. Glaeser, Edward & Saiz, Albert & Gyourko, Joseph, 2008. "Housing Supply and Housing Bubbles," Scholarly Articles 2962640, Harvard University Department of Economics.
  2. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  3. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2011. "Understanding Booms and Busts in Housing Markets," CEPR Discussion Papers 8232, C.E.P.R. Discussion Papers.
  4. Laibson, David I. & Mollerstrom, Johanna Britta, 2010. "Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis," Scholarly Articles 4686766, Harvard University Department of Economics.
  5. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports 218, Federal Reserve Bank of New York.
  6. Joseph Gyourko & Eduardo Morales & Charles Nathanson & Edward Glaeser, 2011. "Housing Dynamics," 2011 Meeting Papers 307, Society for Economic Dynamics.
  7. Hanno N. Lustig & Stijn G. Van Nieuwerburgh, 2005. "Housing Collateral, Consumption Insurance, and Risk Premia: An Empirical Perspective," Journal of Finance, American Finance Association, vol. 60(3), pages 1167-1219, 06.
  8. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August.
  9. Kiminori Matsuyama, 1990. "The Mathematical Appendix to Residential Investment and the Current Account," Discussion Papers 875, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Joshua Aizenman & Yothin Jinjarak, 2008. "Current Account Patterns and National Real Estate Markets," NBER Working Papers 13921, National Bureau of Economic Research, Inc.
  11. Klaus Adam & Albert Marcet, 2011. "Booms and Busts in Asset Prices," CEP Discussion Papers dp1059, Centre for Economic Performance, LSE.
  12. University of Chicago & Pedro Gete, 2009. "Housing Markets and Current Account Dynamics," 2009 Meeting Papers 427, Society for Economic Dynamics.
  13. Klaus Adam & Albert Marcet & Juan Pablo Nicolini, 2006. "Learning and Stock Market Volatility," Computing in Economics and Finance 2006 15, Society for Computational Economics.
  14. Monika Piazzesi & Martin Schneider, 2009. "Momentum traders in the housing market: survey evidence and a search model," Staff Report 422, Federal Reserve Bank of Minneapolis.
  15. Bray, Margaret M & Savin, Nathan E, 1986. "Rational Expectations Equilibria, Learning, and Model Specification," Econometrica, Econometric Society, vol. 54(5), pages 1129-60, September.
  16. Klaus Adam & Albert Marcet, 2011. "Internal Rationality, Imperfect Market Knowledge and Asset Prices," CEP Discussion Papers dp1068, Centre for Economic Performance, LSE.
  17. Matsuyama, Kiminori, 1990. "Residential investment and the current account," Journal of International Economics, Elsevier, vol. 28(1-2), pages 137-153, February.
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