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HOUSING MARKETS, EXPECTATION FORMATION AND INTEREST RATES

Published online by Cambridge University Press:  15 July 2020

Carolin Martin ,
Noemi Schmitt  and
Frank Westerhoff
Carolin Martin
Affiliation:
University of Bamberg
Noemi Schmitt
Affiliation:
University of Bamberg
Frank Westerhoff*
Affiliation:
University of Bamberg
*
Address correspondence to: Frank Westerhoff, University of Bamberg, Feldkirchenstrasse 21, 96045 Bamberg, Germany. e-mail: [email protected]. Phone: +49 9518632634.
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Abstract

Based on a behavioral stock-flow housing market model in which the expectation formation behavior of boundedly rational and heterogeneous investors may generate endogenous boom-bust cycles, we explore whether central banks can stabilize housing markets via the interest rate. Using a mix of analytical and numerical tools, we find that the ability of central banks to tame housing markets by increasing the base (target) interest rate, thereby softening the demand pressure on house prices, is rather limited. However, central banks can greatly improve the stability of housing markets by dynamically adjusting the interest rate with respect to mispricing in the housing market.

Keywords

Housing MarketsHeterogeneous ExpectationsInterest RatesNonlinear Dynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 2 , March 2022 , pp. 491 - 532
Copyright
© Cambridge University Press 2020

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Footnotes

Presented at the 24th Annual Workshop on Economic Science with Heterogeneous Interacting Agents, London, June 24–26, 2019, and at the 25th International Conference on Computing in Economics and Finance, Ottawa, June 28–30, 2019. We thank the participants, in particular Herbert Dawid, Roberto Dieci, Thomas Lux and Jan Tuinstra, for their valuable feedback. The paper also benefited from many helpful suggestions by two anonymous referees and the coeditor, Cars Hommes.

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