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International Capital Flows and House Prices: Theory and Evidence

Jack Favilukis, David Kohn (), Sydney Ludvigson () and Stijn Van Nieuwerburgh

No 17751, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The last fifteen years have been marked by a dramatic boom-bust cycle in real estate prices, accompanied by economically large fluctuations in international capital flows. We argue that changes in international capital flows played, at most, a small role in driving house price movements in this episode and that, instead, the key causal factor was a financial market liberalization and its subsequent reversal. Using observations on credit standards, capital flows, and interest rates, we find that a bank survey measure of credit supply, by itself, explains 53 percent of the quarterly variation in house price growth in the U.S. over the period 1992-2010, while it explains 66 percent over the period since 2000. By contrast, once we control for credit supply, various measures of capital flows, real interest rates, and aggregate activity--collectively--add less than 5% to the fraction of variation explained for these same movements in home values. Credit supply retains its strong marginal explanatory power for house price movements over the period 2002-2010 in a panel of international data, while capital flows have no explanatory power.

JEL-codes: F20 F32 G12 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba and nep-ure
Date: 2012-01
Note: AP
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Published as International Capital Flows and House Prices: Theory and Evidence , Jack Favilukis, David Kohn, Sydney C. Ludvigson, Stijn Van Nieuwerburgh. in Housing and the Financial Crisis , Glaeser and Sinai. 2013

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