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Can learning explain boom-bust cycles in asset prices? An application to the US housing boom

Colin Caines ()

Journal of Macroeconomics, 2020, vol. 66, issue C

Abstract: This paper argues that boom-bust behavior in asset prices can be explained by a model in which boundedly rational agents learn the process for prices. The novel feature of the model is that learning operates in both the demand for assets and the supply of credit. Interactions between agents on either side of the market create complementarities in their respective beliefs, yielding strong internal propagation. The model is applied to US housing markets. Quantitative exercises explain the recent boom-bust in US house prices from observed fundamentals whilst replicating key moments of housing market variables at business cycle frequencies.

Keywords: Learning; Non-rational expectations; House price boom-bust (search for similar items in EconPapers)
JEL-codes: E30 E17 D83 G12 R30 (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: Can Learning Explain Boom-Bust Cycles in Asset Prices? An Application to the US Housing Boom (2017) Downloads
Working Paper: Can Learning Explain Boom-Bust Cycles In Asset Prices? An Application to the US Housing Boom (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:66:y:2020:i:c:s0164070420301816

DOI: 10.1016/j.jmacro.2020.103256

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