House Price Booms and the Current Account ∗

  title={House Price Booms and the Current Account ∗},
  author={Klaus Adam and C Kuang},
A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years 2001-2008. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes’’ rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals… CONTINUE READING
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