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Expectations-driven cycles in the housing market

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  • Lambertini, Luisa
  • Mendicino, Caterina
  • Punzi, Maria Teresa

Abstract

This paper explores the transmission of “news shocks” in a model of the housing market and shows that anticipated signals or beliefs of future macroeconomic developments can generate boom-bust cycles in the housing market and lead to business cycle fluctuations. Anticipated monetary policy and inflationary shocks that turn out to be wrong can also lead to subsequent macroeconomic recessions. Credit frictions also play an important role in generating boom-bust cycle dynamics in the housing market. In particular, favorable credit conditions that are expected to be reversed in the near future generate an housing boom. The active use of the loan-to-value ratio as a policy tool aimed at dampening the severity of expectations-driven cycles effectively reduces the volatility of household debt, aggregate consumption and GDP.

Suggested Citation

  • Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2017. "Expectations-driven cycles in the housing market," Economic Modelling, Elsevier, vol. 60(C), pages 297-312.
    • Handle: RePEc:eee:ecmode:v:60:y:2017:i:c:p:297-312
    DOI: 10.1016/j.econmod.2016.10.004
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    More about this item

    Keywords

    Boom-bust cycles; Credit frictions; Housing market;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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