Expectations-Driven Cycles in the Housing Market

56 Pages Posted: 3 Jul 2010

See all articles by Luisa Lambertini

Luisa Lambertini

Ecole Polytechnique Fédérale de Lausanne

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Maria Teresa Punzi

Vienna University of Economics and Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2010

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.

Keywords: boom-bust cycles, credit frictions, housing market

JEL Classification: E32, E44, E52

Suggested Citation

Lambertini, Luisa and Mendicino, Caterina and Punzi, Maria Teresa, Expectations-Driven Cycles in the Housing Market (July 1, 2010). Banco de Espana Working Paper No. 1021. Available at SSRN: https://ssrn.com/abstract=1633355 or http://dx.doi.org/10.2139/ssrn.1633355

Luisa Lambertini (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

Caterina Mendicino

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Maria Teresa Punzi

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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