Working Paper: NBER ID: w16734
Authors: Craig Burnside; Martin Eichenbaum; Sergio Rebelo
Abstract: Some booms in housing prices are followed by busts. Others are not. It is generally difficult to find observable fundamentals that are useful for predicting whether a boom will turn into a bust or not. We develop a model consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of “social dynamics.” Agents with tighter priors are more likely to convert others to their beliefs. Boom-bust episodes typically occur when skeptical agents happen to be correct. The booms that are not followed by busts typically occur when optimistic agents happen to be correct.
Keywords: No keywords provided
JEL Codes: E32; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agents' beliefs about housing fundamentals (R21) | boom-bust cycles (E32) |
| skeptical agents being correct about the fundamentals (D80) | boom-bust episodes (E32) |
| optimistic agents being correct (D84) | booms do not lead to busts (E32) |
| social interactions (Z13) | expectations of economic agents (D84) |
| dynamics of agents' beliefs (D83) | fluctuations in housing prices (R31) |