Thursday, November 7, 2013

Easy Bank Credit Did Not Cause US Housing Bubble: Research

From "What Explains House Price Booms?: History and Empirical Evidence" by Michael D. Bordo, Harvard University - Department of Economics; National Bureau of Economic Research (NBER) and John S. Landon-Lane, Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics, October 2013, NBER Working Paper w19584:
However, when we look at individual house price boom episodes the cause of the price boom is not so clear. The evidence suggests that the house price boom that occurred in the US during the 1990s and 2000s was not due to easy bank credit. Loose monetary policy (as well as low inflation) played some role but the residual which may be picking up other factors such as financial innovation and the shadow banking system is the most important shock. This result is robust to many alternative specifications.

VII. Discussion and Conclusion
In particular for the US, Canada and the UK during this period, the rise in house prices cannot be explained by innovations to loans from the banking sector. In these individual cases the historical decomposition suggests that house prices would have remained stable if only bank credit shocks were present. Two of these countries, the US and the UK, have significant shadow banking sectors and it could be that financial innovations or easy credit from the shadow banking system are to blame for the house price booms rather than easy credit through the formal banking system.

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