MANAGING HOUSING BUBBLES IN REGIONAL ECONOMIES UNDER EMU: IRELAND AND SPAIN. ESRI Research Bulletin 2010/2/1

The international financial crisis has inflicted substantial damage on many economies around the globe. In Ireland and Spain, the impact has been particularly severe, due largely to the collapse of housing bubbles in both economies. The significant economic instability caused by the abrupt ending of such housing market bubbles highlights the importance of developing policy instruments to manage housing markets and to prevent dangerous bubbles from emerging. Our recent paper** shows how the advent of EMU relaxed financial constraints in Ireland and Spain, allowing for a more rapid expansion of the housing stock in those countries to meet their specific demographic circumstances. If this process had been properly managed there would have been significant benefits for both economies. However, because the housing boom was not controlled by governments these two economies have suffered serious damage. Due to the idiosyncratic nature of housing markets, monetary policy, as implemented by the ECB, cannot be used to manage housing markets within regional economies in EMU. However, the paper argues that fiscal policy instruments can and should be used to manage housing bubbles and thereby avoid the severe damage caused to economies by their collapse