Housing markets, monetary policy, and the international co‐movement of housing bubbles

• Published date: 01 May 2020
• DOI: http://doi.org/10.1111/roie.12454
• Date: 01 May 2020
• Author: Petre Caraiani,Adrian Cantemir Călin

Rev Int Econ. 2020;28:365–375. wileyonlinelibrary.com/journal/roie

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365

© 2019 John Wiley & Sons Ltd

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INTRODUCTION

The emerging consensus after the Great Recession is that it was caused by the U.S. housing market

and the related subprime mortgage crisis. As Mayer (2011) underscored, recent movements in both

U.S. and global house prices cannot be reconciled with changes in fundamentals. For our analysis, we

retain one key fact that emerged from the above‐mentioned study: the run‐up in house prices was not

confined to the United States, as house prices in many other countries behaved similarly in terms of

the magnitude and duration of increase.

To support these claims, we present evidence from a few recent papers, although we do not in-

tend to produce a comprehensive review of the literature. For the case of the United States, using a

price–rent‐based econometric approach, Kivedal (2013) showed that there was a bubble1

prior to the

2007–2008 financial crisis. In a more extensive study, Engsted, Hviid, and Pedersen (2016) examined

the existence of bubbles in a selection of 18 OECD countries. Their approach was based on unit root

tests and a co‐explosive VAR framework applied to the price–rent ratio. They found explosiveness in

many housing markets.

Received: 4 July 2019

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Revised: 5 October 2019

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Accepted: 15 October 2019

DOI: 10.1111/roie.12454

ORIGINAL ARTICLE

Housing markets, monetary policy, and the

international co‐movement of housing bubbles

PetreCaraiani1,2

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Adrian CantemirCălin1,2

1Institute for Economic

Forecasting,Romanian Academy,

Bucharest, Romania

2Bucharest University of Economic

Studies, Bucharest, Romania

Correspondence

Petre Caraiani, Institute for Economic

Forecasting, Romanian Academy,

Bucuresti, Romania.

Email: caraiani@ipe.ro

Abstract

We analyze whether there was co‐movement in bubbles at

the international level from the mid‐1990s to 2018 using

a data set of developed and emerging economies. We first

identify the markets that were more prone to volatility and

speculation before the crisis. Second, we determine and

compare the responses of bubbles in housing markets to

monetary policy in a Bayesian time‐varying framework.

We then study the co‐movement of bubble responses to

monetary shocks before and after the crisis using a dynamic

factor model. This approach allows us to disentangle a com-

mon global factor from factors specific to high/low specula-

tive housing markets.