Booms and Busts in Construction and Housing. An explanation of the European Financial Crisis?

Essay from the year 2016 in the subject Business economics - Accounting and Taxes, grade: 1,0, , course: Economics of Accounting and Finance, language: English, abstract: The European Financial Crisis was a crippling event in modern economic history. In the aftermath of the crisis, national as well as international, public as well as private institutions are researching the origin of the crisis and ways to prevent a second occurrence. Research and literature show that a determining factor for the crash of the financial markets were construction and housing prices. As a result of this observation a possible explanation for the European Financial Crisis could be found in boom and bust cycles of these industries. The following paper will briefly introduce the background of the boom and bust cycles based upon the New Keynesian perspective of Endemic Business Cycle as well as the socio-economic background of the crisis. In a next step supporting and opposing arguments of the introduced model are presented, and analyzed. The paper will conclude that while the boom and bust cycles are not as co-depended as the model indicates, the European Financial Crisis was indeed strongly influenced by the boom and subsequent bust of Construction and Housing prices. The correlation with credit booms played a decisive role in the crash. Thus, authorities are would be well advised to address the correlation in monetary policy.