Heterogeneous beliefs and housing-market boom-bust cycles

Hajime Tomura

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 4, 735-755

Abstract: This paper presents a business cycle model capturing the stylized features of housing-market boom-bust cycles in developed countries. The model implies that over-optimism of mortgage borrowers generates housing-market boom-bust cycles, if mortgage borrowers are credit-constrained and savers do not share their optimism. This result holds without price stickiness. If price stickiness is introduced into the model, then the model replicates a low policy interest rate during a housing boom as an endogenous reaction to a low inflation rate, given a Taylor rule. Thus, monetary easing observed during housing booms are consistent with the presence of over-optimism causing boom-bust cycles.

Keywords: Asset price bubbles; Monetary policy; Financial liberalization; House prices; Credit constraints (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:4:p:735-755

DOI: 10.1016/j.jedc.2012.11.002

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