Capital Inflows, Financial Innovation and Housing Booms
4 Pages Posted: 19 Jun 2012
Date Written: March 1, 2012
Abstract
The run-up to the recent global financial crisis was characterized by an environment of low interest rates and a rapid increase in housing market activity across OECD countries. Some scholars argue that expansionary monetary policy was responsible for the low level of interest rates and the subsequent house price boom.2 Others contend that the low degree of financial development in emerging market economies led to capital inflows to developed countries, depressing long-term interest rates and stimulating an increase in the demand for housing.3 Figure 1 provides support for this hypothesis, showing that in the period from 1999 to 2006, house prices rose by more in countries with larger current account deficits. This negative correlation suggests the presence of an important link between the current account balance and the housing sector, but the direction of causality is unclear.
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