Household lending, interest rates and housing price bubbles in Korea: Regime switching model and Kalman filter approach

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This study investigates whether interest rates and household lending caused housing price bubbles in Korea over the period of 1986 to 2003. Using a regime-switching model, we found evidence of the existence of housing price bubbles throughout the sample period, with the exception of 1998 when Korea suffered from a financial crisis. Using a Kalman filter technique, we estimated the size of housing price bubbles for the sample period. Finally, using generalized impulse response function analysis and variance decompositions, we found that housing price bubbles increased with household lending and industrial production, whereas they decreased with interest rate; this latter effect is relatively small, however. Policy implications include the importance of preemptive intervention on household lending in order to contain housing price bubbles, but interest rates appear to be a less effective policy tool. (C) 2011 Elsevier B.V. All rights reserved.
Publisher
ELSEVIER SCIENCE BV
Issue Date
2011-05
Language
English
Article Type
Article
Keywords

HONG-KONG; FUNDAMENTALS; MARKETS

Citation

ECONOMIC MODELLING, v.28, no.3, pp.1415 - 1423

ISSN
0264-9993
URI
http://hdl.handle.net/10203/95365
Appears in Collection
RIMS Journal Papers
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