Download this Paper Open PDF in Browser

Betting the House

HKIMR Working Paper No.31/2014

48 Pages Posted: 2 Jan 2015  

Òscar Jordà

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Alan M. Taylor

University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2014

Abstract

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

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

Òscar Jordà

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

Moritz Schularick (Contact Author)

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Alan Taylor

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1572 (Phone)
530-752-9382 (Fax)

HOME PAGE: http://www.econ.ucdavis.edu/faculty/amtaylor/

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States
(434)-924-3177 (Phone)
(434)-982-2904 (Fax)

HOME PAGE: http://people.virginia.edu/~amt7u

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://nber.org

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

HOME PAGE: http://cepr.org

Paper statistics

Downloads
17
Abstract Views
213