This paper presents VAR results on the recent economic history of the U.S. and focuses on the dependence of U.S. macrofinancial variables on international capital flows. Both gross and net flows are included in the analysis. The results indicate that cross-border funding has affected the build-up in the U.S. housing market irrespective of how these flows are defined and measured. Both the savings glut hypothesis and the banking glut hypothesis are supported by these findings. However, net banking flows appear to explain the higher volatility in the increase in house prices as well as the mortgage loan boom.

Using a vector-autoregression (VAR) model and data from the University of Michigan Survey of Consumers, we provide evidence on the importance of news and consumers’ beliefs for housing-market dynamics and aggregate fluctuations. We document that innovations to News on Business Conditions generate hump-shaped responses in house prices and other macroeconomic variables. We also show that innovations to Expectations of Rising House Prices are particularly important in explaining the path of macroeconomic variables during housing booms. To disentangle the effects of News on Business Conditions from other sources of expectation-driven cycles, we estimate a VAR where the News variable is ordered first. Innovations to News on Business Conditions generate Expectations of Rising House Prices. However, during housing booms, innovations to Expectations of Rising House Prices unrelated to News on Business Conditions account for a large part of macroeconomic fluctuations. Shocks to News and Expectations account together for more than half of the forecast error variance of house prices, and other macroeconomic variables, during periods of booms in house prices.