Research

Published and unpublished papers by Wei Xiao

News, Housing Boom-Bust Cycles, and Monetary Policy

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Coauthored with Birol Kanik, forthcoming in the International Journal of Central Banking (Download working paper)
In this paper, we explore the possibility that a housing market boom-bust cycle may arise when public beliefs are driven by news shocks. News, imperfect and noisy by nature, may generate expectations that are overly optimistic or pessimistic. Over-optimism easily leads to excessive buildup of housing assets, and creates a housing boom that is not based on fundamentals. When the news is found false or inaccurate, investors revert their actions, and a downturn in the housing market follows. By altering agents’ net worth conditions, a housing cycle can have signi…cant repercussions in the aggregate economy. In this paper, we construct a dynamic general equilibrium model that can give rise to a news-driven cycle, and we then explore what types of monetary policies are appropriate in terms of stabilizing it.
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Written by wxiao

October 29, 2009 at 2:06 pm

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