A New Policy Paradigm
KDI series in Economic Policy and Development
Edited by Susan Wachter, Man Cho and Moon Joong Tcha
Chapter 3: Housing and business cycles in Korea: assessing the role of housing volume cycles
This chapter studies the role of housing volume cycles in macroeconomic fluctuations in the Korean economy. It is often argued that the housing boom and bust in major OECD countries (including the U.S.) served as a main cause of the recent global financial crisis. The abrupt rise of home prices and household debts up to the unsustainable levels and their subsequent fall resulted in failures of financial institutions and recessions. In addition, it is also argued that the significant contraction in residential buildings investment prior to the subprime mortgage crisis had contributed substantially to the recession (Leamer 2007, 2009). Housing cycles may interact with macroeconomic fluctuations through changes in home prices, household debts and residential investments (Figure 3.1). Previous studies focused mainly on the role of house prices and household credits rather than the quantitative contributions of housing volumes in explaining the macroeconomic fluctuations.
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