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A Model of housing and credit cycles with imperfect market knowledge

Kuang, Pei (2014) A Model of housing and credit cycles with imperfect market knowledge. Discussion Paper. University of Birmingham, Birmingham.

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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.

Type of Work:Monograph (Discussion Paper)
School/Faculty:Colleges (2008 onwards) > College of Social Sciences
Number of Pages:54
Date:17 September 2014
Series/Collection Name:Birmingham Business School Discussion Paper Series
Keywords:Boom-Bust, Collateral Constraints, Learning, Leverage, Housing
Subjects:H Social Sciences > HB Economic Theory
H Social Sciences > HV Social pathology. Social and public welfare
Copyright Status:The discussion paper is copyright of the University, the author and/or third parties. The intellectual property rights in respect of this work are defined by the The Copyright Designs and Parents Act 1988 or as modified by any successor legislation. Any use made of information contained in this paper must be in accordance with theta legislation and must be properly acknowledged. Copies of the paper may be distributed and quotations used for research and study purposes, with due attribution. However, commercial distribution or reproduction in any format is prohibited without the permission of the copyright holder.
Copyright Holders:The Authors and the University of Birmingham
ID Code:1931

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