A Model of Housing and Credit Cycles with Imperfect Market Knowledge

Pei Kuang

Discussion Papers from Department of Economics, University of Birmingham

Abstract: The paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion/contraction. Positive (negative) development in house price fuels optimism (pessimism) and credit expansion (contraction), which in turn boost (dampen) housing demand and house prices and reinforce agents' optimism (pessimism). Bayesian learning about house prices can endogenously generate self-reinforcing booms and busts in house prices and significantly strenthen the role of collateral constraints in aggregate fluctuations. The model can quantitatively account for the 2001-2008 U.S. boom-bust cycle in house prices and associated household debt and consumption dynamics. It also demonstrates that allowing for imperfect knowledge knowledge of agents, a higher leveraged economy is more prone to self-reinforcing fluctuations.

Keywords: Boom Bust; Collateral Constraints; Learning; Leverage Housing (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 E44 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2014-03
New Economics Papers: this item is included in nep-cta, nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Journal Article: A model of housing and credit cycles with imperfect market knowledge (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bir:birmec:14-07

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