HOUSE PRICES, EXPECTATIONS,AND TIME-VARYING FUNDAMENTALS: DISCUSSION

Presented by A.G. Malliaris

AMERICAN ECONOMIC ASSOCIATION

Allied Social Science Associations Annual MeetingsSan Diego, California, January 3-6, 2013

Outline of Discussion

• Overview of Housing Prices• The Financial Crisis• Modeling Choices• Results• Comments

US Housing Bubble and Monetary Policy

• Controversial Issue• Taylor’s Views• The Fed’s Views• More Practically: How to Respond to a

Growing Bubble?• The Asymmetric Approach: High Cost Ex-post• The Symmetric Approach: Cost Ex-ante

Housing Bubbles and Institutions

• High Transactions Costs• Social Policies Favoring Housing• Forecasting Value of Collateral• Low Down Payment Compared to Equity• Difficulty to Sell Short• Tracking the Banks, Households, Firms, Public

Sector

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.083

85

87

89

91

93

95

97

99

101

103

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

(%, Seasonally adjusted, inverted)

Unemployment Rate(right scale)

Sources: US Department of Labor, FRB

(2007=100, Seasonally adjusted)

Last seen in 2005

Unemployment rate:Last seen in 1983

Industrial Production:Last seen in 1997

Industrial Production(left scale)

Exhibit 4. US Economy Is still a Long Way from Previous Peak

9

Exhibit 5. Euro-Zone Economy Is still a Long Way from Previous Peak

10

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.085

90

95

100

105

110

115

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Sources: Eurostat

(%, Seasonally adjusted, inverted)(Seasonally adjusted, 2005=100)

Industrial Production(left scale)

Unemployment Rate(right scale)

Last seen in 1997

Last seenin 2005

Exhibit 11. Japan’s De-leveraging with Zero Interest Rates Lasted for 10 Years

11

-6

-4

-2

0

2

4

6

8

10

-15

-10

-5

0

5

10

15

20

25

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Borrowings from Financial Institutions (left scale)

Funds raised in Securities Markets (left scale)

CD 3M rate (right scale)

(% Nominal GDP, 4Q Moving Average) (%)

Sources: Bank of Japan, Cabinet Of f ice, Japan

Debt-financedbubble

(4 years)

Balance sheetrecession(16 years)

Funds Raised by Non-Financial Corporate Sector

Important Contribution

Behavioral Issues

Concluding Comments

• Paper makes an important contribution by proposing and calibrating 3 models

• In view of major shifts in monetary policy does it make sense to check for robustness? Consider 1960 to 1994 and 1995 to 2011?

• Do the 3 models have implications for monetary policy?

• Possible use of Behavioral Finance Arguments such as momentum?