The global savings glut and the housing boom

Abstract

The U.S. housing boom from 2000 to 2006 consisted of two fundamentally different phases. An increase in foreign credit supply (a savings glut) can explain the initial countercyclical run-up in house prices from 2000 through 2002, whereas an increase in domestic credit demand –driven by a relaxation of domestic credit standards– can explain the subsequent procyclical boom phase from 2003 to 2006. A tightening of domestic credit standards can fully explain the bust from 2007 to 2010. I base these conclusions on a quantitative open economy model with housing and collateralized foreign debt. Countercyclical government spending financed by a lump sum tax stabilizes house prices, output and domestic inflation over the entire boom period, pushes the economy away from the zero lower bound, and raises domestic utility.