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The information on the betting house provides useful information that can be traced back 140 years ago to ultra low-interest rates and its influence on the financial crisis. Over 14 economies data has been examined for the likelihood of a financial stability risks due to…
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Read the article, then provide a critical review of the article, summarize the article and provide your critical interpretation of the article
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due: Critical Review The information on the betting house provides useful information that can be traced back 140 years ago to ultra low-interest rates and its influence on the financial crisis. Over 14 economies data has been examined for the likelihood of a financial stability risks due to low-interest rates and also the link between house price booms and mortgage credit. Financial crisis is as a result of low-interest rates, house price bubbles and mortgage booms due to post-World War II housing finance leverage democratization. The central bank is a prerequisite in resolving this issue that has resulted due to a history of easy money that has easily destabilized finances.
Unproven recent house bubbles and low-interest rates have brought about froth in house markets and result in a financial instability. The task remains for central banks to maintain a balance between igniting another house price bubbles and a need to raise economic status from the ground. Riksbank also experienced the dilemma. Fluctuations of the house prices and their effects on real outcomes of the economy, households spending, health of financial intermediaries and the mortgage borrowing have been re-examined majorly on their sources. Macroeconomics has recently questioned the role of the housing finance and also the implication of house price and monetary policy on house price fluctuations.
Data from such long history has been collected, the first covers non-financial businesses for 17 economies, disaggregated bank credit data and real estate lending. The second data covers 14 to 17 economies unearthed long-run house prices from 1870-2012. Policy trilemma of international macroeconomic is used, to provide sources of exogenous variation in domestic monetary conditions and perturbations of domestic interest rates. Also to estimate the impact of monetary conditions on real estate on house prices an instrument variable, IV strategy, was used (Jorda, Schularick & Taylor 5).
Trilemma is used to identify perturbations of domestic interest rates that are unrelated to domestic economic conditions. Only one or two of the three trilemma policies will be selected, capital mobility, fixed exchange rates or monetary policy. Exogenous fluctuations effects on the link between mortgage credit price on house price busts and booms are measured using strategy IV. Trilemma when measuring exchange rates uses a base year of some country such as the U.S that does not take into consideration other economies when formulating their foreign monetary policy choices. As a result of the long-term low-interest rates and mortgage lending, house prices have increased, and financial crisis have emerged (Jorda, Schularick & Taylor 14).
In my view, the financial crisis have been highly likely due to low-interest rates, house price bubbles and mortgage booms of more than 140 years of modern macroeconomic history. Financial crisis is even stronger due to leverage democratization after World War II and as banks give more house loans for real estate due to growth in the GDP. Also, cheaper credit makes houses cheaper, and monetary conditions are loose making it easier for people to acquire mortgages. This in effect would bring about the financial crisis (Jorda, Schularick & Taylor 33).
Work cited
Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. "Betting the house." Journal of
International Economics (2014). Read More
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