This dissertation considers a dynamic stochastic general equilibrium model to explore the possibility that housing market boom-bust cycle may arise when public beliefs are driven by news shocks. Public expectations about the future are changed by noisy signals, news. News, imperfect and noisy by nature, may generate expectations that are overly optimistic or pessimistic. Over-optimism creates a housing boom that is not based on fundamentals. By altering agents’ networth conditions and eligibility to borrow, housing boom leads to an economic expansion. When agents realize that their expectations are over-optimistic, they revert their actions, a downturn in housing market and aggregate economy follow. It is shown that the credit market, where borrowing is allowed with collateralized asset, plays a key role in amplifying and propagating the effects of news shocks on the economy.

This dissertation also considers appropriate monetary policies to stabilize news-driven business cycles. The results favor Taylor-type rules with strong responses to output and inflation Responding to asset prices has not much benefi on stabilizing fluctuation driven by news. Moreover, in this dissertation, different monetary policy rules including ones that respond to asset prices are analyzed in terms of their effects on determinacy and learnability of equilibrium.