The U.S. housing price bubble: Bernanke versus Taylor

• We model aggregate U.S. housing prices in a reduced form setting.
• We find evidence consistent with John Taylor's argument about housing prices.
• We find evidence consistent with Ben Bernanke's argument about housing prices.
• We find evidence that these two arguments are not mutually exclusive arguments.

This paper examines the effects of two major macro-economic forces argued by opposing renowned U.S. economists to have contributed most significantly to the U.S. housing price bubble that preceded the recent global financial crisis. The first force examined, as argued by John Taylor, is the Federal Reserve's loose monetary policy stance from 2002 to 2005. The second force examined, as argued by Ben Bernanke, is the substantial global inflow of capital to the U.S. over the same time period. We develop and estimate a reduced form model for U.S. housing prices, and find evidence consistent with both factors’ contributing significantly to the recent macro-housing price behavior in the U.S.