Working Paper: NBER ID: w20771
Authors: Scar Jordà ; Moritz H.P. Schularick; Alan M. Taylor
Abstract: Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.
Keywords: Monetary policy; Housing markets; Financial stability; Credit growth
JEL Codes: C14; C38; E32; E37; E42; E44; E51; E52; F41; G01; G21; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| booms in real estate lending (G21) | financial crises (G01) |
| house prices (R31) | financial crises (G01) |
| historical evidence of rapid mortgage credit growth (G21) | increased likelihood of financial instability (F65) |
| loose monetary conditions (E66) | booms in real estate lending (G21) |
| loose monetary conditions (E66) | house prices (R31) |
| lower interest rates (E43) | increased borrowing (H74) |
| lower interest rates (E43) | higher housing prices (R31) |