Title: The Recent Boom-Bust Cycle: The Relative Contribution of Capital Flows, Credit Supply and Asset Bubbles
Authors: INT VELD JanRACIBORSKI RafalRATTO MarcoROEGER Werner
Citation: EUROPEAN ECONOMIC REVIEW vol. 55 p. 386-406
Publisher: ELSEVIER SCIENCE BV
Publication Year: 2011
JRC N°: JRC62821
ISSN: 0014-2921
URI: www.elsevier.com/locate/eer
http://publications.jrc.ec.europa.eu/repository/handle/JRC62821
DOI: 10.1016/j.euroecorev.2010.12.004
Type: Articles in Journals
Abstract: We use an estimated open economy DSGE model with financial frictions for the US and the rest of the world to evaluate various competing explanations about the recent boom bust cycle. We find that the savings glut hypothesis is insufficient for explaining all aspects of the boom in the US. Also, relatively strong TFP growth and expansionary monetary policy are not able to explain fully the volatility of corporate and in particular residential investment. We identify bubbles in the stock and housing market as crucial. Concerning the downturn in 2008/09, the fall in house prices and residential investment only plays a minor role. Mortgage defaults have more explanatory power, especially in a specification of the model with a segregated equity market. Finally, the bursting of the stock market bubble was at least as important in this recession as in 2001. Because of various negative shocks hitting the economy at the same time in 2008/09 and continued positive technology growth, not only the real interest rate declined but inflation fell rapidly and left insufficient room for monetary policy to play a similar stabilising role as in previous recessions.
JRC Institute:Institute for the Protection and Security of the Citizen

Files in This Item:
There are no files associated with this item.


Items in repository are protected by copyright, with all rights reserved, unless otherwise indicated.