Front Matter Page
Research Department
Table of Contents
Summary
I. Introduction and Overview
II. The Role of Monetary Conditions in the Asset Price Inflation
III. A Model of Real Property Prices
1. The arbitrage condition as a model of property prices
2. Property prices in a model of supply and demand with expectations
IV. Empirical Representations of the Model
V. The Empirical Results
VI. Conclusions
Text Tables
1. Maximum-Likelihood Estimates of the Preferred Specifications
Charts
1. Total Private Nonfinancial Sector Debt
2. Property Prices
3. Japan: Money, Income, and Prices
4. Japan: Money, Debt, and Inflation
5. United States: Money, Income, and Prices
6. United States: Money, Debt, and Inflation
7. United States: Actual and Predicted Relative Property Prices
8. Japan: Actual and Predicted Relative Property Prices
Appendix I. Rational Expectations Solution of the Model
Appendix II. Estimated Equations for the Alternative Model Specifications
Appendix Tables
2. United States: Maximum-Likelihood Estimates of the Rational Expectations Model for Relative Property Prices
3. Japan: Maximum-Likelihood Estimates of the Rational Expectations Model for Relative Property Prices
References
Summary
In reviewing the asset price cycles that occurred in the 1980s in the United States and Japan, it appears that the effects of excessively expansionary monetary policies were more highly concentrated in real estate markets than is usually the case during an economic boom. The principal aim of this paper is to test the hypothesis that monetary policy affected real estate prices differently in the 1980s than it did in the 1970s. A model of price-determination is developed in which the equilibrium price of real estate relative to a more general price index is influenced by various demand and supply factors, including real income and cost variables, monetary policy variables, and expectations. Various empirical representations of the model are estimated using maximum-likelihood techniques under different assumptions about both the role of expectations and the model’s dynamic structure.
The estimated equations suggest that monetary policy variables were important determinants of the relative price of real estate in the United States and Japan, and that there was a structural break in both countries in the 1980s. In particular, the results indicate that interest rates became a statistically more significant determinant of real estate values. Moreover, the within-sample predictions of the model indicate that the relative price of real estate would have increased less in the United States, and adjustments would have been less volatile in Japan, had the structural break not occurred.