News, Housing Boom-Bust Cycles, and Monetary Policy

We explore the possibility that a housing market boombust cycle may arise when public beliefs are driven by news shocks. News, imperfect and noisy by nature, may generate expectations that are overly optimistic or pessimistic. Overoptimism easily leads to excessive accumulation of housing assets and creates a housing boom that is not based on fundamentals. When the news is found false or inaccurate, investors revert their actions, and a downturn in the housing market follows. By altering agents’ net worth conditions, a housing cycle can have significant repercussions in the aggregate economy. In this paper, we construct a dynamic general equilibrium model that can give rise to a news-driven housing boom-bust cycle, and consider how monetary policies should respond to it.