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The recent recession differs from other post-war recessions in two important respects: it has seriously disrupted the financial system, and it has already exhibited strong resilience to monetary stimulus. Yet, as we demonstrate in this paper, the recent recession shares two important features with other post-war recessions: most recessions originate in a pronounced downturn in expenditures on new single-family and multi-family housing units, and the housing sector is the primary transmission channel for monetary policy in both downturns and recoveries. We argue that there are three reasons this recession differs from past recessions. Excessive mortgage credit – augmented by large foreign capital inflows – created a house price bubble. When it collapsed, many households and financial firms were left burdened with extreme balance sheet problems. Consequently, accommodative monetary policy has had a muted impact on households that seek to de-leverage rather than borrow for new housing assets. Moreover, in a saturated housing market, residential construction, which has led all sustained post-war recoveries, has also been suppressed.


Working Paper 10-02



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