TY  - JOUR
AU  - Adam, Klaus
AU  - Kuang, Pei
AU  - Marcet, Albert
TI  - House Price Booms and the Current Account
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17224
PY  - 2011
Y2  - July 2011
DO  - 10.3386/w17224
UR  - http://www.nber.org/papers/w17224
L1  - http://www.nber.org/papers/w17224.pdf
N1  - Author contact info:
Klaus Adam
University of Oxford
Nuffield College
New Road
Oxford OX1 1NF
United Kingdom
E-Mail: klaus.adam@economics.ox.ac.uk

Pei Kuang
JG Smith Building
Department of Economics
University of Birmingham
UK B152TT 
E-Mail: P.Kuang@bham.ac.uk

Albert Marcet
Department of Economics
London School of Economics
Houghton Street
London WC2A 2AE
United Kingdom
Tel: 00-44-207-955-7480
E-Mail: marcet.albert@gmail.com
M1  - published as Klaus Adam, Pei Kuang, Albert Marcet. "House Price Booms and the Current Account," in Daron Acemoglu and Michael Woodford, editors, "NBER Macroeconomics Annual 2011, Volume 26" University of Chicago Press (2012)

M3  - presented at "26th Annual Conference on Macroeconomics", April 8-9, 2011
AB  - A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years 2001-2008. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes' rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals, so that low interest rates can fuel a house price boom. House price booms, however, are not necessarily synchronized across countries and the model is consistent with the heterogeneous response of house prices across the G7 following the reduction in real interest rates at the beginning of the millennium. The response to interest rates depends sensitively on agents' beliefs at the time of the interest rate reduction, which in turn are a function of the country specific history prior to the year 2000. According to the model, the US house price boom could have been largely avoided, if real interest rates had decreased by less after the year 2000.
ER  -