Austrian business cycle theory continues to make a comeback

Just read the abstract from the latest NBER working paper by Òscar Jordà, Moritz HP. Schularick, and Alan M. Taylor:

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 projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

The piece is called “Betting the House,” and you will find some non-gated copies here.  And to my Austrian-oriented readers, please don’t let this evidence push you away from more synthetic accounts of what is going on…

Here is FTAlphaville coverage of the paper.  And here is an interesting paper on interest rates and equity extraction.


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