News, Housing Boom-Bust Cycles, and Monetary Policy

News, Housing Boom-Bust Cycles, and Monetary Policy

Title:

News, Housing Boom-Bust Cycles, and Monetary Policy

Number:

14/15

Author(s):

Birol Kanık, Wei Xiao

Language:

English

Date:

May 2014

Abstract:

We explore the possibility that a housing market boom-bust cycle may arise when public beliefs are driven by news shocks. News, imperfect and noisy by nature, may generate expectations that are overly optimistic or pessimistic. Over-optimism easily leads to excessive accumulation of housing assets, and creates a housing boom that is not based on fundamentals. When the news is found false or inaccurate, investors revert their actions, and a downturn in the housing market follows. By altering agents’ net worth conditions, a housing cycle can have significant repercussions in the aggregate economy. In this paper, we construct a dynamic general equilibrium model that can give rise to a news-driven housing boom-bust cycle, and we consider how monetary policies should respond to it .

Keywords:

News, Housing prices, Monetary policy

JEL Codes:

E3; E4; E5

News, Housing Boom-Bust Cycles, and Monetary Policy
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