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Housing markets, expectation formation and interest rates

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  • Martin, Carolin
  • Schmitt, Noemi
  • Westerhoff, Frank
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 following an interest rate rule that adjusts the interest rate with respect to mispricing in the housing market.

Suggested Citation

  • Martin, Carolin & Schmitt, Noemi & Westerhoff, Frank, 2019. "Housing markets, expectation formation and interest rates," BERG Working Paper Series 142, Bamberg University, Bamberg Economic Research Group.
    • Handle: RePEc:zbw:bamber:142
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    References listed on IDEAS

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    More about this item

    Keywords

    housing markets; heterogeneous expectations; variance beliefs; endogenous boom-bust cycles; interest rates; nonlinear dynamics;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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