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The baby boom: predictability in house prices and interest rates

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Author Info
Robert F. Martin

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Abstract

This paper explores the baby boom's impact on U.S. house prices and interest rates in the post-war 20th century and beyond. Using a simple Lucas asset pricing model, I quantitatively account for the increase in real house prices, the path of real interest rates, and the timing of low-frequency fluctuations in real house prices. The model predicts that the primary force underlying the evolution of real house prices is the systematic and predictable changes in the working age population driven by the baby boom. The model is calibrated to U.S. data and tested on international data. One surprising success of the model is its ability to predict the boom and bust in Japanese real estate markets around 1974 and 1990.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 847.

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Date of creation: 2005
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Handle: RePEc:fip:fedgif:847

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Related research
Keywords: Housing - Prices ; Interest rates ; Asset pricing ; Econometric models;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  3. Owen Lamont & Jeremy C. Stein, 1999. "Leverage and House-Price Dynamics in U.S. Cities," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 498-514, Autumn. [Downloadable!] (restricted)
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  4. John F. Helliwell, 2004. "Demographic Changes and International Factor Mobility," NBER Working Papers 10945, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Mankiw, N. Gregory & Weil, David N., 1991. "The baby boom, the baby bust, and the housing market A reply to our critics," Regional Science and Urban Economics, Elsevier, vol. 21(4), pages 573-579, December. [Downloadable!] (restricted)
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  7. Andrew B. Abel, 2001. "Will Bequests Attenuate The Predicted Meltdown In Stock Prices When Baby Boomers Retire?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 589-595, November. [Downloadable!] (restricted)
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  8. N. Gregory Mankiw & David N. Weil, 1990. "The Baby Boom, The Baby Bust, and the Housing Market," NBER Working Papers 2794, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. José-Víctor Ríos-Rull, 2001. "Population Changes and Capital Accumulation: The Aging of the Baby Boom," Advances in Macroeconomics, Berkeley Electronic Press, vol. 1(advances/), pages 1008-1008. [Downloadable!] (restricted)
  10. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October. [Downloadable!] (restricted)
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  11. Jess Benhabib & Richard Rogerson & Randall Wright, 1991. "Homework in macroeconomics: household production and aggregate fluctuations," Staff Report 135, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  12. Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March. [Downloadable!] (restricted)
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  13. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2005. "Can financial innovation help to explain the reduced volatility of economic activity?," Finance and Economics Discussion Series 2005-54, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  14. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  15. Andrew Ang & Angela Maddaloni, 2003. "Do Demographic Changes Affect Risk Premiums? Evidence from International Data," NBER Working Papers 9677, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Edward L. Glaeser & Joseph Gyourko & Raven Saks, 2005. "Why Have Housing Prices Gone Up?," NBER Working Papers 11129, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Author-Name: John Geanakoplos & Michael Magill & Martine Quinzii, 2004. "Demography and the Long-Run Predictability of the Stock Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2004-1), pages 241-326. [Downloadable!]
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  18. Marvin Goodfriend & Robert G. King, 2005. "The Incredible Volcker Disinflation," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-007, Boston University - Department of Economics. [Downloadable!]
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  19. James Poterba, 2004. "The Impact of Population Aging on Financial Markets," NBER Working Papers 10851, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Kyung-Mook Lim & David N. Weil, 2003. "The Baby Boom and the Stock Market Boom," Scandinavian Journal of Economics, Blackwell Publishing, vol. 105(3), pages 359-378, 09. [Downloadable!] (restricted)
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  21. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
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  22. John F. Helliwell, 2004. "Demographic changes and international factor mobility," Proceedings, Federal Reserve Bank of Kansas City, issue Aug, pages 369-420. [Downloadable!]
  23. Jeremy Greenwood & Ananth Seshadri & Guillaume Vandenbroucke, 2005. "The Baby Boom and Baby Bust," American Economic Review, American Economic Association, vol. 95(1), pages 183-207, March. [Downloadable!]
  24. Qiang Dai & Thomas Philippon, 2005. "Fiscal Policy and the Term Structure of Interest Rates," NBER Working Papers 11574, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  25. Espen Henriksen & Chris Telmer, 2004. "Demographic Variation, Capital Accumulation and Asset Prices," GSIA Working Papers 2004-E26, Carnegie Mellon University, Tepper School of Business. [Downloadable!]
  26. Morris A. Davis & Jonathan Heathcote, 2005. "Housing And The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 751-784, 08. [Downloadable!] (restricted)
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  27. Jeremy Greenwood & Ananth Seshadri & Mehmet Yorukoglu, 2005. "Engines of Liberation," Review of Economic Studies, Blackwell Publishing, vol. 72(1), pages 109-133, 01. [Downloadable!] (restricted)
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  28. repec:fth:harver:1414 is not listed on IDEAS
  29. Davis, Morris & Heathcote, Jonathan, 2005. "The Price and Quantity of Residential Land in the United States," CEPR Discussion Papers 5333, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  30. Sean D. Campbell, 2004. "Macroeconomic volatility, predictability and uncertainty in the Great Moderation: evidence from the survey of professional forecasters," Finance and Economics Discussion Series 2004-52, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  31. Suparna Chakraborty, 2004. "Accounting for the 'Lost Decade' in Japan," Macroeconomics 0408009, EconWPA. [Downloadable!]
  32. Robin Brooks, 2002. "Asset-Market Effects of the Baby Boom and Social-Security Reform," American Economic Review, American Economic Association, vol. 92(2), pages 402-406, May. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rose Cunningham & Ilan Kolet, 2007. "Housing Market Cycles and Duration Dependence in the United States and Canada," Working Papers 07-2, Bank of Canada. [Downloadable!]
  2. Matteo Iacoviello & Stefano Neri, 2007. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," Boston College Working Papers in Economics 659, Boston College Department of Economics, revised 22 Jan 2008. [Downloadable!]
    Other versions:
  3. James A. Kahn, 2008. "What drives housing prices?," Staff Reports 345, Federal Reserve Bank of New York. [Downloadable!]
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