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Monetary Policy, Housing Booms, And Financial (Im)Balances

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  • Eickmeier, Sandra
  • Hofmann, Boris

Abstract

This paper uses a factor-augmented vector autoregressive model (FAVAR) estimated on U.S. data in order to analyze monetary transmission via private sector balance sheets, credit risk spreads and asset markets in an integrated setup and to explore the role of monetary policy in the three imbalances that were observed prior to the global financial crisis: high house price inflation, strong private debt growth and low credit risk spreads. The results suggest that (i) monetary policy shocks have a highly significant and persistent effect on house prices, real estate wealth and private sector debt as well as a strong short-lived effect on risk spreads in the money and mortgage markets; (ii) monetary policy shocks have contributed discernibly, but at a late stage to the unsustainable developments in house and credit markets that were observable between 2001 and 2006; (iii) financial shocks have influenced the path of policy rates prior to the crisis, and the feedback effects of financial shocks via lower policy rates on property and credit markets are found to have probably been considerable. JEL Classification: E52, E44, C3, E3, E43

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 17 (2013)
Issue (Month): 04 (June)
Pages: 830-860

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Handle: RePEc:cup:macdyn:v:17:y:2013:i:04:p:830-860_00

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Cited by:
  1. Eickmeier, Sandra & Gambacorta, Leonardo & Hofmann, Boris, 2014. "Understanding global liquidity," European Economic Review, Elsevier, vol. 68(C), pages 1-18.
  2. Breitung, Jörg & Eickmeier, Sandra, 2014. "Analyzing business and financial cycles using multi-level factor models," Discussion Papers 11/2014, Deutsche Bundesbank, Research Centre.
  3. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5329-5345.
  4. Pagliacci, Carolina, 2014. "Latin American Performance to External Shocks: What Has Really Been Sweat?," MPRA Paper 57816, University Library of Munich, Germany.

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