HKIMR Working Paper No.31/2014
48 Pages Posted: 2 Jan 2015
Date Written: December 31, 2014
Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.
Keywords: Financial Crises, Monetary Policy, Leverage, Credit, House Prices, Local Projections, Instrumental Variables
JEL Classification: C14, C38, E32, E37, E42, E44, E51, E52, F41, G01, G21, N10, N20
Suggested Citation: Suggested Citation
Jordà, Òscar and Schularick, Moritz and Taylor, Alan M., Betting the House (December 31, 2014). HKIMR Working Paper No.31/2014. Available at SSRN: https://ssrn.com/abstract=2544272 or http://dx.doi.org/10.2139/ssrn.2544272