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Expectations-Driven Cycles in the Housing Market

Lambertini, Luisa and Mendicino, Caterina and Punzi, Maria Teresa (2010): Expectations-Driven Cycles in the Housing Market.

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Abstract

This paper analyzes housing market boom-bust cycles driven by changes in households' expectations. We explore the role of expectations not only on productivity but on several other shocks originated in the housing market, the credit market, the production sector and the conduct of monetary policy. We find that expectations related to different sectors of the economy can generate booms in the housing market in accordance with the empirical findings. However, only expectations of future expansionary monetary policy that are not fulfilled can also generate a macroeconomic recession. Regarding the credit market, increased access to credit generates boom-bust cycles only if it is expected to be reversed in the near future. Moreover, economies with higher access to credit are characterized by higher volatility of consumption and indebtedness but, not necessarily, of real GDP.

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