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Sorry to burst your bubble

Research by Oscar Jorda and Alan Taylor (from UC Davis) together with Moritz Schularick (U. of Bonn) cited in the latest issue of The Economist

Oscar Jorda, Moritz Schularick and Alan Taylor examine bubbles in housing and equity markets over the past 140 years. The most dangerous, they conclude, are housing bubbles fuelled by credit booms. The least troublesome are equity bubbles that do not rely on debt. Five years after the bursting of a debt-laden housing bubble, the authors find, GDP per person is nearly 8% lower than after a "normal" recession (ie, one that is not accompanied by a financial crisis). In contrast, five years after a stockmarket crash, GDP per person is only 1% or so lower. If the stock bubble comes alongside a big rise in debt, the damage to GDP per person is 4%. The paper does not explain why housing bubbles are more costly, but a fair inference is that, whereas equity investments tend to be concentrated among the rich, plenty of people lower down the income ladder have wealth tied up in housing.

 

You can read the full article in The Economist here

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