Housing markets, expectation formation and interest rates

Carolin Martin, Noemi Schmitt and Frank Westerhoff

No 142, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: Based on a behavioral stock-flow housing market model in which the expectation formation behavior of boundedly rational and heterogeneous investors may generate endogenous boom-bust cycles, we explore whether central banks can stabilize housing markets via the interest rate. Using a mix of analytical and numerical tools, we find that the ability of central banks to tame housing markets by increasing the base (target) interest rate, thereby softening the demand pressure on house prices, is rather limited. However, central banks can greatly improve the stability of housing markets by following an interest rate rule that adjusts the interest rate with respect to mispricing in the housing market.

Keywords: housing markets; heterogeneous expectations; variance beliefs; endogenous boom-bust cycles; interest rates; nonlinear dynamics (search for similar items in EconPapers)
JEL-codes: D91 E58 R31 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: HOUSING MARKETS, EXPECTATION FORMATION AND INTEREST RATES (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:142

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