Citation

Discussion Paper Details

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Title: Betting the House

Author(s): �scar Jord�, Moritz Schularick and Alan M. Taylor

Publication Date: December 2014

Keyword(s): credit, financial crises, house prices, instrumental variables, leverage, local projections and monetary policy

Programme Area(s): Economic History and International Macroeconomics

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.

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Bibliographic Reference

Jord�, �, Schularick, M and Taylor, A. 2014. 'Betting the House'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10305