The global savings glut and the housing boom

Peter Lihn Jørgensen

Journal of Economic Dynamics and Control, 2023, vol. 146, issue C

Abstract: The U.S. housing boom from 2000 to 2006 consisted of two fundamentally different phases. An increase in foreign credit supply (a savings glut) can explain the initial countercyclical run-up in house prices from 2000 through 2002, whereas an increase in domestic credit demand –driven by a relaxation of domestic credit standards– can explain the subsequent procyclical boom phase from 2003 to 2006. A tightening of domestic credit standards can fully explain the bust from 2007 to 2010. I base these conclusions on a quantitative open economy model with housing and collateralized foreign debt. Countercyclical government spending financed by a lump sum tax stabilizes house prices, output and domestic inflation over the entire boom period, pushes the economy away from the zero lower bound, and raises domestic utility.

Keywords: Housing and credit boom; House prices; Collateral constraints; Savings glut (search for similar items in EconPapers)
JEL-codes: E30 E32 E37 E52 E62 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:146:y:2023:i:c:s0165188922002664

DOI: 10.1016/j.jedc.2022.104563

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