More or Less Openness? The Credit Cycle, Housing, and Policy
Maria Elisa Farias () and
David R. Godoy
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Maria Elisa Farias: Department of Industrial Engineering, Universidad Técnica Federico Santa María, Avenida Santa María 6400, Santiago 7630000, Chile
David R. Godoy: Department of Industrial Engineering, Universidad Técnica Federico Santa María, Avenida Santa María 6400, Santiago 7630000, Chile
Economies, 2025, vol. 13, issue 7, 1-46
Abstract:
Housing prices have recently risen sharply in many countries, primarily linked to the global credit cycle. Although various factors play a role, the ability of developing countries to navigate this cycle and maintain autonomous monetary policies is crucial. This paper introduces a dynamic macroeconomic model featuring a housing production sector within an imperfect banking framework. It captures key housing and economic dynamics in advanced and emerging economies. The analysis shows domestic liquidity policies, such as bank capital requirements, reserve ratios, and currency devaluation, can stabilize investment and production. However, their effectiveness depends on foreign interest rates and liquidity. Stabilizing housing prices and risk-free bonds is more effective in high-interest environments, while foreign liquidity shocks have asymmetric impacts. They can boost or lower the effectiveness of domestic policy, depending on the country’s level of financial development. These findings have several policy implications. For example, foreign capital controls would be adequate in the short term but not in the long term. Instead, governments would try to promote the development of local financial markets. Controlling debt should be a target for macroprudential policy as well as promoting saving instruments other than real estate, especially during low interest rates.
Keywords: credit cycle; housing shocks; small open economy; investment decisions; monetary policy (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecomi:v:13:y:2025:i:7:p:207-:d:1704580
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