Expectations-Driven Cycles in the Housing Market

This paper analyzes housing market boom-bust cycles driven by changes in households' expectations. We explore the role of expectations on productivity and other shocks originating from the housing market, the credit market 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 empirical findings. Only expectations of future expansionary monetary policy that are not fulfilled can 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.

[1]  C. Borio,et al.  Asset Prices, Financial and Monetary Stability: Exploring the Nexus , 2002 .

[2]  S. Rebelo,et al.  Can News About the Future Drive the Business Cycle? , 2006 .

[3]  BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM , 2000 .

[4]  José-Víctor Ríos-Rull,et al.  AN AGGREGATE ECONOMY WITH DIFFERENT SIZE HOUSES , 2008 .

[5]  Oscar J. Arce,et al.  Banking Competition, Collateral Constraints and Optimal Monetary Policy , 2010 .

[6]  Pau Rabanal,et al.  Macroeconomic Patterns and Monetary Policy in the Run-Up to Asset Price Busts , 2009, SSRN Electronic Journal.

[7]  Oscar Arce,et al.  Housing Bubbles , 2008 .

[8]  Aitor Lacuesta,et al.  El efecto del ciclo económico en las entradas y salidas de inmigrantes en España , 2010 .

[9]  Pablo Burriel,et al.  Is a Calvo Price Setting Model Consistent with Micro Price Data? , 2010 .

[10]  M. Uribe,et al.  What's News in Business Cycles , 2008 .

[11]  Cristina Barceló,et al.  The Response of Household Wealth to the Risk of Losing the Job: Evidence from Differences in Firing Costs , 2010 .

[12]  R. Townsend,et al.  No Bank, One Bank, Several Banks: Does it Matter for Investment? , 2010 .

[13]  Sveriges Riksbank.  Expectation driven business cycles with limited enforcement , 2009 .

[14]  Roland Füss,et al.  Macroeconomic Determinants of International Housing Markets , 2010 .

[15]  H. Khan,et al.  The Quantitative Importance of News Shocks in Estimated DSGE Models , 2012 .

[16]  J. Jimeno,et al.  Changes in the Wage Structure in EU Countries , 2010, SSRN Electronic Journal.

[17]  José Manuel Montero,et al.  Understanding the Spanish Business Innovation Gap: The Role of Spillovers and Firms’ Absorptive Capacity , 2010 .

[18]  A. García.  The mark-ups in the Spanish economy: international comparison and recent evolution , 2009 .

[19]  Luis M. Viceira,et al.  The Euro as a Reserve Currency for Global Investors , 2010 .

[20]  A. Banerjee,et al.  Financial Development and the Instability of Open Economies , 2004 .

[21]  G. Quirós,et al.  Asymmetric Standing Facilities: An Unexploited Monetary Policy Tool , 2012 .

[22]  J. Imbs,et al.  Credit Supply and the Price of Housing , 2010 .

[23]  M. Ratto,et al.  The recent boom–bust cycle: The relative contribution of capital flows, credit supply and asset bubbles , 2011 .

[24]  Á. Estrada,et al.  The Mark-Ups in the Spanish Economy: International Comparison and Recent Evolution , 2009 .

[25]  J. Campbell.  Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model , 1992, Journal of Monetary Economics.

[26]  J. Jimeno,et al.  Employment Fluctuations in a Dual Labor Market , 2010 .

[27]  Fabio Canova,et al.  Do Institutional Changes Affect Business Cycles? Evidence from Europe , 2009 .

[28]  J. Costain,et al.  Wage, Inflation and Employment Dynamics with Labour Market Matching , 2009 .

[29]  José L. Fernández,et al.  The Relationship between Public and Private Saving in Spain: Does Ricardian Equivalence Hold? , 2009 .

[30]  D. J. Pedregal,et al.  A Quarterly Fiscal Database for the Euro Area Based on Intra-Annual Fiscal Information , 2009, SSRN Electronic Journal.

[31]  T. Bollerslev,et al.  Testing Non-linear Dependence in the Hedge Fund Industry Testing Non-linear Dependence in the Hedge Fund Industry Testing Non-linear Dependence in the Hedge Fund Industry , 2010 .

[32]  Margarita Rubio.  Housing Market Heterogeneity in a Monetary Union , 2009 .

[33]  Price, Wage and Employment Response to Shocks: Evidence from the WDN Survey , 2010 .

[34]  F. Cingano,et al.  The Effect of Employment Protection Legislation and Financial Market Imperfections on Investment: Evidence from a Firm-Level Panel of EU Countries , 2009, SSRN Electronic Journal.

[35]  Gabriel Jiménez,et al.  How Does Competition Impact Bank Risk Taking? , 2007 .

[36]  John R. Nofsinger.  Household Behavior and Boom/Bust Cycles , 2010 .

[37]  Max Gillman,et al.  Monetary Effects on Nominal Oil Prices , 2009 .

[38]  Rhys R. Mendes,et al.  Should Central Banks Adjust Their Target Horizons in Response to House-Price Bubbles? , 2007 .

[39]  Juan S. Mora-Sanguinetti,et al.  Developments in Retail Trade Regulation in Spain and Their Macroeconomic Implications , 2009 .

[40]  COLLATERAL CONSTRAINT AND NEWS-DRIVEN CYCLES , 2012, Macroeconomic Dynamics.

[41]  G. Bertola,et al.  Price, Wage and Employment Response to Shocks: Evidence from the WDN Survey , 2009, SSRN Electronic Journal.

[42]  B. Bernanke,et al.  Monetary Policy and Asset Price Volatility , 2000 .

[43]  Expectations-Driven Cycles in the Housing Market , 2010 .

[44]  Gabriel Pérez-Quirós,et al.  High-Growth Recoveries, Inventories and the Great Moderation , 2009 .

[45]  P. Kujal,et al.  International Trade Policy towards Monopoly and Oligopoly , 2009 .

[46]  Martin Schneider,et al.  Federal Reserve Bank of Minneapolis Research Department Staff Report 422 Momentum Traders in the Housing Market: Survey Evidence and a Search Model * , 2022 .

[47]  Martin Schneider,et al.  Housing, Consumption, and Asset Pricing , 2006 .

[48]  A. Calza,et al.  Housing Finance and Monetary Policy , 2009, SSRN Electronic Journal.

[49]  Lawrence J. Christiano,et al.  Monetary Policy and Stock Market Boom-Bust Cycles , 2008, SSRN Electronic Journal.

[50]  Sectoral Shocks and Aggregate Fluctuations , 1997 .

[51]  André Kurmann,et al.  News Shocks and the Slope of the Term Structure of Interest Rates , 2010 .

[52]  Matteo Iacoviello,et al.  Housing Market Spillovers: Evidence from an Estimated DSGE Model , 2008 .

[53]  Galo Nũno.  Optimal Research and Development Expenditure: A General Equilibrium Approach , 2010 .

[54]  Matteo Iacoviello.  House prices, borrowing constraints and monetary policy in the business cycle , 2005 .

[55]  Matteo Iacoviello,et al.  International business cycles with domestic and foreign lenders , 2006 .

[56]  Pedro Silos.  Housing, Portfolio Choice, and the Macroeconomy , 2005 .

[57]  Enrique Sentana,et al.  Multivariate Location-Scale Mixtures of Normals and Mean-Variance-Skewness Portfolio Allocation , 2009 .

[58]  P. Beaudry,et al.  Stock Prices, News and Economic Fluctuations , 2003 .

[59]  Kristopher Gerardi,et al.  Why Did so Many People Make so Many Ex Post Bad Decisions? the Causes of the Foreclosure Crisis , 2012 .

[60]  Caterina Mendicino.  COLLATERAL REQUIREMENTS: MACROECONOMIC FLUCTUATIONS AND MACRO-PRUDENTIAL POLICY , 2012 .

[61]  Miles S. Kimball,et al.  Sticky Price Models and Durable Goods , 2007 .

[62]  Enrique Sentana,et al.  Distributional Tests in Multivariate Dynamic Models with Normal and Student-t Innovations , 2009, Review of Economics and Statistics.

[63]  Jeremy Greenwood,et al.  Investment, Capacity Utilization and the Real Business Cycle , 1988 .

[64]  Fabio Milani,et al.  The Effects of Monetary Policy “News” and “Surprises” , 2012 .

[65]  Tommaso Monacelli.  New Keynesian Models, Durable Goods and Collateral Constraints , 2006 .

[66]  Vintage Capital and Expectations Driven Business Cycles , 2007 .

[67]  John V. Duca,et al.  Housing markets and the financial crisis of 2007-2009: lessons for the future , 2010 .

[68]  R. Gimeno,et al.  Extraction of Financial Market Expectations about Inflation and Interest Rates from a Liquid Market , 2009 .

[69]  M. Nieto,et al.  What Do Premiums Paid for Bank M&As Reflect? The Case of the European Union , 2010 .

[70]  Caterina Mendicino.  Credit Market and Macroeconomic Volatility , 2007, SSRN Electronic Journal.

[71]  Brian M. Doyle,et al.  House Prices and Monetary Policy : A Cross-Country Study , 2005 .

[72]  Javier J. Pérez,et al.  Public and private sector wages interactions in a general equilibrium model , 2009, SSRN Electronic Journal.

[73]  David de Antonio Liedo.  General Equilibrium Restrictions for Dynamic Factor Models , 2010 .

[74]  Ignacio Hernando Castellet,et al.  Cash, access to credit, and value creation in M&As , 2009 .

[75]  Jeffrey R. Campbell,et al.  The Role of Collateralized Household Debt in Macroeconomic Stabilization , 2004 .

[76]  N. Kiyotaki,et al.  Winners and Losers in Housing Markets , 2008 .

[77]  Pengfei Wang,et al.  Land-Price Dynamics and Macroeconomic Fluctuations , 2011 .

[78]  Teresa Leal Linares,et al.  Análisis de las desviaciones presupuestarias aplicado al caso del presupuesto del Estado , 2010 .

[79]  Paul Beaudry,et al.  When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings? , 2004, J. Econ. Theory.

[80]  Wouter J. den Haan,et al.  Anticipated Growth and Business Cycles in Matching Models , 2007 .

[81]  Hajime Tomura.  International capital flows and expectation-driven boom-bust cycles in the housing market , 2010 .

[82]  D. J. Pedregal,et al.  Short-Term Monitoring of the Spanish Government Balance with Mixed-Frequencies Models , 2010 .

[83]  J. P. García,et al.  Is there a signalling role for public wages?: evidence for the euro area based on macro data , 2009 .

[84]  Laura Hospido.  Job Changes and Individual-Job Specific Wage Dynamics , 2009, SSRN Electronic Journal.

[85]  Galo Nũno.  Technology, Convergence and Business Cycles , 2009 .

[86]  Martin Summer,et al.  A Systematic Approach to Multi-Period Stress Testing of Portfolio Credit Risk , 2010 .

[87]  Paloma Lopez-Garcia,et al.  What Makes a High-Growth Firm? A Probit Analysis Using Spanish Firm-Level Data , 2009 .

[88]  A. Marcet,et al.  House Price Booms and the Current Account , 2011, NBER Macroeconomics Annual.

[89]  A. Garcia-Herrero,et al.  What Explains the Low Profitability of Chinese Banks? , 2009 .

[90]  Margarita Rubio.  Fixed and Variable-Rate Mortgages, Business Cycles and Monetary Policy , 2009 .

[91]  Ramón María-Dolores,et al.  On the Informational Role of Term Structure in the U.S. Monetary Policy Rule , 2009 .

[92]  M. H. Heycock,et al.  Papers , 1971, BMJ : British Medical Journal.

[93]  Juana Aledo Martínez,et al.  Firm-Specific Factors Influencing the Selection of Accounting Options Provided by the IFRS: Empirical Evidence from Spanish Market , 2009 .

[94]  Robert B. Barsky,et al.  News Shocks , 2009 .

[95]  J. Campa,et al.  Cash, Access to Credit, and Value Creation in M&As , 2009 .

[96]  J. Córdoba,et al.  Credit Cycles , 2003 .

[97]  Anton A. Nakov,et al.  Oilgopoly: A General Equilibrium Model of the Oil-Macroeconomy Nexus , 2009 .

[98]  Paul Beaudry,et al.  An Exploration into Pigou's Theory of Cycles , 2001 .

[99]  Raquel Vegas Sánchez,et al.  Retirement Behaviour and Retirement Incentives in Spain , 2009 .

[100]  W. C. Hunter,et al.  Asset price bubbles : the implications for monetary, regulatory, and international policies , 2005 .

[101]  J. Mencía.  Assessing the Risk-Return Trade-Off in Loans Portfolios , 2009 .

[102]  Stephen G. Cecchetti,et al.  Asset Prices in a Flexible Inflation Targeting Framework , 2002 .

[103]  Pablo Burriel,et al.  Fiscal Policy Shocks in the Euro Area and the US: An Empirical Assessment , 2009, SSRN Electronic Journal.

[104]  H. Bjørnland,et al.  The role of house prices in the monetary policy transmission mechanism in small open economies , 2010 .

[105]  Internal and external habits and news-driven business cycles , 2009 .

[106]  Pedro C. Vicente,et al.  Micro evidence of the brain gain hypothesis: The case of Cape Verde , 2009 .

[107]  Alfredo Martín Oliver.  From proximity to distant banking: Spanish banks in the EMU , 2010 .

[108]  James A. Kahn.  What Drives Housing Prices? , 2008 .

[109]  Caterina Mendicino,et al.  Credit Frictions, Housing Prices and Optimal Monetary Policy Rules , 2005 .

[110]  Marco Del Negro,et al.  99 Luftballons: Monetary Policy and the House Price Boom Across U.S , 2007 .