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Title: Heterogeneous Beliefs and Housing-Market Boom-Bust Cycles

Citation Type: Working Paper

Publication Year: 2010

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Abstract: This paper presents a business cycle model where different beliefs on the accuracy of news about future technological progress lead to heterogeneous expectations among households. The model shows that over-optimism of home-buyers causes housing-market boom-bust cycles if home-buyers are credit-constrained and savers do not share the over-optimism. If prices are sticky, the inflation rate and the nominal policy interest rate are low during booms and rising around the ends of booms, as typically observed in developed countries. The sensitivity of boom-bust cycles to monetary policy depends on the elasticity of labour supply. Higher availability of mortgage debt amplifies boom-bust cycles.

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Authors: Tomura, Hajime

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Publication Number: 2009-15

Institution: Bank of Canada

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Data Collections: IPUMS CPS

Topics: Housing and Segregation

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