Business Intelligence

Expectations-Driven Cycles In The Housing Market

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Executive Summary

This paper analyzes housing market boom-bust cycles driven by changes in households' expectations. The author explores 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. It's found 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 findings. Moreover, expectations of either a future reduction in the policy rate or a temporary increase in the central bank's inflation target that are not fulfilled generate a macroeconomic recession.

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