Boom-bust cycles are created when credit-constrained borrowers wrongly expect house prices to rise, according to a paper published in late November by the Bank of Canada.

The paper, entitled ‘Optimal Monetary Policy during endogenous housing-market boom-bust cycles', constructs a small open economy model to simulate Canada, and posits two types of households: borrowers, who take out mortgage loans and savers, who provide them. As inflation is countercyclical during boom-bust cycles, strong