A model of housing and credit cycles with imperfect market knowledge

Pei Kuang

doi:10.1016/j.euroecorev.2014.06.013

A model of housing and credit cycles with imperfect market knowledge

Pei Kuang

Economics

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Abstract

The paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion/contraction. Positive (negative) development in house prices fuels optimism (pessimism) and credit expansion (contraction), which in turn boost (dampen) housing demand and house prices and reinforce agents׳ optimism (pessimism). Bayesian learning about house prices can endogenously generate self-reinforcing booms and busts in house prices and significantly strengthen the role of collateral constraints in aggregate fluctuations. The model can quantitatively account for the 2001–2008 U.S. boom-bust cycle in house prices and associated household debt and consumption dynamics. It also demonstrates that allowing for imperfect knowledge of agents, a higher leveraged economy is more prone to self-reinforcing fluctuations.

Original language	English
Pages (from-to)	419-437
Number of pages	19
Journal	European Economic Review
Volume	70
Early online date	7 Jul 2014
DOIs	https://doi.org/10.1016/j.euroecorev.2014.06.013
Publication status	Published - 1 Aug 2014

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10.1016/j.euroecorev.2014.06.013

Kuang_Model_housing_credit_cycles_European_Economic_Review_2014
NOTICE: this is the author’s version of a work that was accepted for publication in European Economic Review. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Economic Review [VOL 70, August 2014] DOI: 10.1016/j.euroecorev.2014.06.013 Eligibility for repository checked October 2014
Accepted author manuscript, 646 KBLicence: Other (please specify with Rights Statement)

http://linkinghub.elsevier.com/retrieve/pii/S0014292114001007

Cite this

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title = "A model of housing and credit cycles with imperfect market knowledge",

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JO - European Economic Review

JF - European Economic Review

ER -

A model of housing and credit cycles with imperfect market knowledge

Abstract

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