NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

House Price Booms and the Current Account

Klaus Adam, Pei Kuang, Albert Marcet

NBER Working Paper No. 17224
Issued in July 2011
NBER Program(s):   AP   IFM

A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years 2001-2008. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes' rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals, so that low interest rates can fuel a house price boom. House price booms, however, are not necessarily synchronized across countries and the model is consistent with the heterogeneous response of house prices across the G7 following the reduction in real interest rates at the beginning of the millennium. The response to interest rates depends sensitively on agents' beliefs at the time of the interest rate reduction, which in turn are a function of the country specific history prior to the year 2000. According to the model, the US house price boom could have been largely avoided, if real interest rates had decreased by less after the year 2000.

download in pdf format
   (431 K)

email paper

This paper is available as PDF (431 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17224

Published:

Users who downloaded this paper also downloaded these:
Favilukis, Kohn, Ludvigson, and Van Nieuwerburgh w17751 International Capital Flows and House Prices: Theory and Evidence
Capozza, Hendershott, Mack, and Mayer w9262 Determinants of Real House Price Dynamics
Burnside, Eichenbaum, and Rebelo w16734 Understanding Booms and Busts in Housing Markets
Aizenman and Jinjarak w13921 Current Account Patterns and National Real Estate Markets
Deng, Gyourko, and Wu w18403 Land and House Price Measurement in China
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us