News, Housing Boom-Bust Cycles, and Monetary Policy
by Birol Kanika and Wei Xiaob
We explore the possibility that a housing market boombust
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. Overoptimism
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 agentsí 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 consider how monetary policies should respond to it.
JEL Codes: E3, E4, E5.
Full article (PDF, 50 pages, 796 kb)
a Central Bank of the Republic of Turkey
b State University of New York at Binghamton