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Betting the House

Oscar Jorda (), Moritz Schularick () and Alan Taylor ()

No 10305, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

Keywords: credit; financial crises; house prices; instrumental variables; leverage; local projections; monetary policy (search for similar items in EconPapers)
JEL-codes: C14 C38 E32 E37 E42 E44 E51 E52 F41 G01 G21 N10 N20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-opm
Date: 2014-12
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Journal Article: Betting the house (2015) Downloads
Chapter: Betting the House (2014)
Working Paper: Betting the House (2014) Downloads
Working Paper: Betting the House (2014) Downloads
Working Paper: Betting the House (2014) Downloads
Working Paper: Betting the House (2014) Downloads
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