The financial crisis showed, once again, that neglecting real estate booms can have disastrous consequences. In this paper, we spell out the circumstances under which a more active policy agenda on this front would be justified. Then, we offer insights on the pros and cons as well as implementation challenges of various policy tools that can be used to contain the damage to the financial system and the economy from real estate boom–bust episodes. These insights derive from econometric analysis, when possible, and case studies of country experiences. Broadly, booms financed through credit and involving leverage are more likely to warrant a policy response. In that context, macroprudential measures can be targeted more precisely to specific sources of risk, but they may prove ineffective because of circumvention. In that case, monetary policy may have to be used to lean against the wind.
Christopher Crowe, Giovanni Dell’Ariccia, Deniz Igan, and Pau Rabanal
Journal of Financial Stability