Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/329487 
Year of Publication: 
2025
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 13 [Issue:] 7 [Article No.:] 207 [Year:] 2025 [Pages:] 1-46
Publisher: 
MDPI, Basel
Abstract: 
Housing prices have recently risen sharply in many countries, primarily linked to the global credit cycle. Although various factors play a role, the ability of developing countries to navigate this cycle and maintain autonomous monetary policies is crucial. This paper introduces a dynamic macroeconomic model featuring a housing production sector within an imperfect banking framework. It captures key housing and economic dynamics in advanced and emerging economies. The analysis shows domestic liquidity policies, such as bank capital requirements, reserve ratios, and currency devaluation, can stabilize investment and production. However, their effectiveness depends on foreign interest rates and liquidity. Stabilizing housing prices and risk-free bonds is more effective in high-interest environments, while foreign liquidity shocks have asymmetric impacts. They can boost or lower the effectiveness of domestic policy, depending on the country’s level of financial development. These findings have several policy implications. For example, foreign capital controls would be adequate in the short term but not in the long term. Instead, governments would try to promote the development of local financial markets. Controlling debt should be a target for macroprudential policy as well as promoting saving instruments other than real estate, especially during low interest rates.
Subjects: 
credit cycle
housing shocks
small open economy
investment decisions
monetary policy
JEL: 
E01
E04
E05
E06
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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