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Low Interest Rates And Housing Booms: The Role Of Capital Inflows, Monetary Policy And Financial Innovation

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Executive Summary

A number of OECD countries experienced an environment of low interest rates and a rapid increase in housing market activity during the last decade. Previous work suggests three potential explanations for these events: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this paper, the authors examine the effects of these three factors on the housing market. The authors estimate a Panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions.

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