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What Explains House Price Booms?: History and Empirical Evidence

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  • Michael D. Bordo
  • John Landon-Lane

Abstract

In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit with house price booms. Using a panel of 11 OECD countries from 1920 to 2011 we estimate a panel VAR in order to identify shocks that can be interpreted as loose monetary policy shocks, low inflation shocks, bank credit shocks and house price shocks. We show that loose monetary policy played an important role in housing booms along with the other shocks. We show that during boom periods there is a heightened impact of all three "policy" shocks with the bank credit shock playing an important role. However, when we look at individual house price boom episodes the cause of the price boom is not so clear. The evidence suggests that the house price boom that occurred in the US during the 1990s and 2000s was not due to easy bank credit. Loose monetary policy (as well as low inflation) played some role but the residual which may be picking up other factors such as financial innovation and the shadow banking system is the most important shock. This result is robust to many alternative specifications.

Suggested Citation

  • Michael D. Bordo & John Landon-Lane, 2013. "What Explains House Price Booms?: History and Empirical Evidence," NBER Working Papers 19584, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19584 Note: DAE ME
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    Cited by:

    1. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2015. "Leveraged bubbles," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 1-20.
    2. Cendejas Bueno, José Luis & Castañeda, Juan Enrique & Muñoz, Félix, 2015. "Business cycles and monetary regimes in the U.S. (1960 – 2014): A plea for monetary stability," Working Papers in Economic Theory 2015/05, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    3. Heike Joebges & Sebastian Dullien & Alejandro Márquez-Velázquez, 2015. "What causes housing bubbles?," IMK Studies 43-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Michael D. Bordo, 2013. "The Federal Reserve's Role: Actions Before, During, and After the 2008 Panic in the Historical Context of the Great Contraction," Economics Working Papers 13111, Hoover Institution, Stanford University.
    5. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2015. "Betting the house," Journal of International Economics, Elsevier, vol. 96(S1), pages 2-18.
      • Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2014. "Betting the House," NBER Chapters,in: NBER International Seminar on Macroeconomics 2014, pages 2-18 National Bureau of Economic Research, Inc.
    6. Michael Bordo & Pierre Siklos, 2014. "Central Bank Credibility, Reputation and Inflation Targeting in Historical Perspective," NBER Working Papers 20693, National Bureau of Economic Research, Inc.
    7. Allan H. Meltzer, 2014. "Slow Recovery with Low Inflation," Book Chapters,in: Martin Neil Baily & John B. Taylor (ed.), Across the Great Divide: New Perspectives on the Financial Crisis, chapter 8 Hoover Institution, Stanford University.
    8. Carvallo, Oscar & Pagliacci, Carolina, 2013. "Macroeconomic Shocks, Housing Market and Banks’ Performance in Venezuela," MPRA Paper 58711, University Library of Munich, Germany, revised Jul 2014.
    9. 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.
    10. Michael D. Bordo, 2013. "Review of Ben S. Bernanke: The Federal Reserve and the Financial Crisis," Economics Working Papers 13109, Hoover Institution, Stanford University.
    11. Michael D. Bordo, 2014. "The Federal Reserve's Role: Actions Before, During, and After the 2008 Panic the Historical Context of the Great Contraction," Book Chapters,in: Martin Neil Baily & John B. Taylor (ed.), Across the Great Divide: New Perspectives on the Financial Crisis, chapter 6 Hoover Institution, Stanford University.
    12. 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.

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    JEL classification:

    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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