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A mechanism for booms and busts in housing prices

  • Hillebrand, Marten
  • Kikuchi, Tomoo

We study an exchange economy with overlapping generations of consumers who derive utility from consuming a non-durable commodity and housing. A banking sector offers loans to finance housing. We provide a complete characterization of the equilibrium dynamics which alternates between an expansive regime where housing prices increase and banks expand loans and a contractive regime associated with decreasing housing values and shrinking credit volume. Regime switches occur even under small but persistent income changes giving rise to large and recurrent booms and busts in housing prices not reflecting changes in fundamentals.

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Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 40.

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Date of creation: 2012
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Handle: RePEc:zbw:kitwps:40
Contact details of provider: Web page: http://www.wiwi.kit.edu/

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  1. Michel, Philippe & Wigniolle, Bertrand, 2003. "Temporary bubbles," Journal of Economic Theory, Elsevier, vol. 112(1), pages 173-183, September.
  2. Farhi, Emmanuel & Tirole, Jean, 2009. "Bubbly Liquidity," IDEI Working Papers 577, Institut d'Économie Industrielle (IDEI), Toulouse, revised Feb 2011.
  3. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  4. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
  5. Herakles Polemarchakis, 2001. "Debt, liquidity and dynamics," Working Papers 2001-22, Brown University, Department of Economics.
  6. Bajari, Patrick & Chan, Phoebe & Krueger, Dirk & Miller, Daniel, 2010. "A Dynamic Model of Housing Demand: Estimation and Policy Implications," CEPR Discussion Papers 7911, C.E.P.R. Discussion Papers.
  7. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
  8. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  9. Céline Rochon & Herakles Polemarchakis, 2006. "Debt, liquidity and dynamics," Economic Theory, Springer, vol. 27(1), pages 179-211, 01.
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