House Price Booms and the Current Account

Klaus Adam, Pei Kuang and Albert Marcet

No 17224, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years 2001-2008. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes' rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals, so that low interest rates can fuel a house price boom. House price booms, however, are not necessarily synchronized across countries and the model is consistent with the heterogeneous response of house prices across the G7 following the reduction in real interest rates at the beginning of the millennium. The response to interest rates depends sensitively on agents' beliefs at the time of the interest rate reduction, which in turn are a function of the country specific history prior to the year 2000. According to the model, the US house price boom could have been largely avoided, if real interest rates had decreased by less after the year 2000.

JEL-codes: E44 F32 F41 (search for similar items in EconPapers)
Date: 2011-07
New Economics Papers: this item is included in nep-cba, nep-mac, nep-opm and nep-ure
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (99)

Published as Klaus Adam & Pei Kuang & Albert Marcet, 2012. "House Price Booms and the Current Account," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 77 - 122.
Published as House Price Booms and the Current Account , Klaus Adam, Pei Kuang, Albert Marcet. in NBER Macroeconomics Annual 2011, Volume 26 , Acemoglu and Woodford. 2012

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Journal Article: House Price Booms and the Current Account (2012)
Chapter: House Price Booms and the Current Account (2011)
Working Paper: House Price Booms and the Current Account (2011)
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