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Betting the House

Listed author(s):
  • Òscar Jordà
  • Moritz HP. Schularick
  • Alan M. Taylor

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20771.

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Date of creation: Dec 2014
Publication status: published as Betting the House , Òscar Jordà, Moritz Schularick, Alan M. Taylor. in NBER International Seminar on Macroeconomics 2014 , Clarida, Frankel, Giavazzi, and Rey. 2015
Handle: RePEc:nbr:nberwo:20771
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