Expectations-Driven Cycles in the Housing Market

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

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 that originate in the housing market, the credit market and the conduct of monetary policy. We find that, in the presence of nominal rigidities, expectations on both the conduct of monetary policy and future productivity can generate housing market boom-bust cycles in accordance with the empirical findings. Moreover, expectations of either a future reduction in the policy rate or a temporary increase in the central bank's inflation target that are not fulfilled generate a macroeconomic recession. Increased access to credit generates a boom-bust cycle in most variables only if it is expected to be reversed in the near future.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit Frictions, Boom-Bust Cycles, News Shocks, Housing Prices.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

[1] Ahearne, A.G., J. Ammer, B.M. Doyle, L.S. Kole and R.F. Martin. 2005. \House Prices and Monetary Policy: A Cross-Country Study." Board of Governors of the Federal Reserve System International Finance Discussion Papers 841.

[2] Basant Roi, M. and R. Mendes, 2007. \Should Central Banks Adjust Their Target Horizons in Response to House-Price Bubbles?" Bank of Canada Discussion Papers 07-4.

[3] Beaudry, P. and F. Portier. 2004. \An Exploration into Pigou's Theory of Cycles," Journal of Monetary Economics, 51: 1183-1216.

[4] Beaudry, P. and F. Portier. 2006. \Stock Prices, News, and Economic Fluctuations," American Economic Review, 96(4): 1293-1307.

[5] Beaudry, P. and F. Portier. 2007. \When can Changes in Expectations Cause Business Cycle Fluctuations in Neo-classical Settings?." Journal of Economic Theory, 135(1): 458-477.

[6] Bernanke B. and M.Gertler. 1999. \Monetary Policy and Asset Price Volatility". In New Chal- lenges for Monetary Policy, 77-128, Federal Reserve Bank of Kansas City.

[7] Borio C. and P. Lowe 2002. "Asset prices, nancial and monetary stability: exploring the nexus". BIS wp 114.

[8] Campbell, J. 1994. "Inspecting the Mechanism: an Analytical Approach to the Stochastic Growth Model". Journal of Monetary Economics, 33(3): 463-506.

[9] Cecchetti, S., H. Genberg and S. Wadhwani. 2003. \Asset Prices in a Flexible In ation Tar- geting Framework." In Asset Price Bubbles: The Implications for Monetary, Regulatory and International Policies, 427-44. Cambridge, MA: MIT Press.

[10] Christiano, L., C. Ilut, R. Motto, and M. Rostagno. 2008. \Monetary Policy and Stock Market Boom-Bust Cycles." ECB Working Paper Series 955.

[11] Den Haan, W.J., and G. Kaltenbrunner, 2007. \Anticipated Growth and Business Cycles in Matching models." CEPR Discussion Paper 6063.

[12] Floden, M., 2007. \Vintage Capital and Expectations Driven Business Cycles." CEPR Discus- sion Paper 6113.

[13] Greenwood, J., G. W. Human, and Z. Hercowitz, (1988), Investment, Capacity Utilization, and the Real Business Cycle, American Economic Review, vol. 78.

[14] Horvath, M., 2000. \Sectoral Shocks and Aggregate Fluctuations." Journal of Monetary Eco- nomics, 45(1):69-106.

[15] Iacoviello, M. 2005. \House Prices, Borrowing Constraints, and Monetary Policy in the Busi- ness Cycle." American Economic Review, 95(3): 739-64.

[16] Iacoviello, M. and S. Neri, 2009. \Housing Market Spillovers: Evidence from an Estimated DSGE Model." AEJ Macro, forthcoming.

[17] Jaimovich, N. and S. Rebelo, 2009. \Can News about the Future Drive the Business Cycle?", American Economic Review, forthcoming.

[18] Kiyotaki, N. and J. Moore (1997),\Credit Cycles," Journal of Political Economy, 105, April 211-48.

[19] Kobayashi, K., T. Nakajima and M. Inaba, 2007. \Collateral Constraint and News-driven Cycles." Discussion paper 07013, Research Institute of Economy, Trade and Industry (RIETI).

[20] Mendicino C. and A. Pescatori, 2008. \Credit Frictions, Housing Prices and Optimal Monetary Policy Rules".

[21] Schmitt-Grohe s. and M. Uribe. 2008. "What's News in Business Cycles". NBER Working Paper No. 14215

[22] Walentin, K., 2009. "Expectation Driven Business Cycles with Limited Enforcement,"Working Paper Series 229, Sveriges Riksbank.

[23] Wouters R., and F. Smets, 2003. "Output Gaps: Theory versus Practice," Computing in Economics and Finance, 2003 256.