Expectations-driven cycles in the housing market

Abstract

This paper analyzes housing market boom-bust cycles driven by changes in households’ expectations. We explore the role of expectations not only on productivity but on several other shocks that originate in the housing market, the credit market and the conduct of monetary policy. We fi nd that, in the presence of nominal rigidities, expectations on both the conduct of monetary policy and future productivity can generate housing market boom-bust cycles in accordance with the empirical fi ndings. Moreover, expectations of either a future reduction in the policy rate or a temporary increase in the central bank’s infl ation target that are not fulfi lled generate a macroeconomic recession. Increased access to credit generates a boom-bust cycle in most variables only if it is expected to be reversed in the near future