Betting the House.pdfVIP

FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Betting the House Òscar Jordá Federal Reserve Bank of San Francisco and University of California Davis Moritz Schularick University of Bonn and CEPR Alan M. Taylor University of California Davis, NBER and CEPR December 2014 Working Paper 2014-28 /economic-research/publications/working-papers/wp2014-28.pdf The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Betting the House ` † ‡ § Oscar Jorda Moritz Schularick Alan M. Taylor ` December 2014 Abstract Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projecti