Authors

Moritz Schularick

Alan M. Taylor

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2014-28 | December 1, 2014

Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

Article Citation

Taylor, Alan M., Moritz Schularick, and Oscar Jorda. 2014. “Betting the House,” Federal Reserve Bank of San Francisco Working Paper 2014-28. Available at https://doi.org/10.24148/wp2014-28

About the Author
Òscar Jordà
Òscar Jordà is a senior policy advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Òscar Jordà