Betting the House

Oscar Jorda, Moritz Schularick and Alan Taylor
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Moritz Schularick: University of Bonn and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research

No 312014, Working Papers from Hong Kong Institute for Monetary Research

Abstract: 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.

Keywords: Financial Crises; Monetary Policy; Leverage; Credit; House Prices; Local Projections; Instrumental Variables (search for similar items in EconPapers)
JEL-codes: C14 C38 E32 E37 E42 E44 E51 E52 F41 G01 G21 N10 N20 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-12
New Economics Papers: this item is included in nep-ban, nep-his, nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Betting the house (2015)
Chapter: Betting the House (2014)
Working Paper: Betting the House (2014)
Working Paper: Betting the House (2014)
Working Paper: Betting the House (2014)
Working Paper: Betting the House (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hkm:wpaper:312014

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