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The effect of monetary policy on house price inflation: A factor augmented vector autoregression (FAVAR) approach

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Author Info

  • Rangan Gupta
  • Alain Kabundi

Abstract

Purpose – This paper seeks to assess the impact of monetary policy on house price inflation for the nine census divisions of the US economy. Design/methodology/approach – A factor-augmented VAR (FAVAR) model is estimated using a large data set comprising of 126 quarterly series over the period 1976:01 to 2005:02. Findings – Overall, the results of this investigation show that house price inflation responds negatively to a positive monetary policy shock, suggesting that the framework does not experience the widely observed price puzzle encountered while analyzing monetary policy shocks with standard sized VARs. Research limitations/implications – The paper only considers house price inflation and ignores other housing market variables. Moreover, given the recent economy-wide decline in the house price growth rates, it would be worthwhile to update the data set to a more recent period, to capture the possible breakdown in the relationship of house prices with fundamentals driving the market. Practical implications – The results based on the impulse response functions indicate that, in general, house price inflation responds negatively to monetary policy shock, but the responses are heterogeneous across the census divisions. In addition, the findings suggest, in particular, the importance of South Atlantic, East South Central, West South Central, Mountain and the Pacific divisions in shaping the dynamics of US house price inflation. Originality/value – To the best of one's knowledge, this is the first paper to analyze the effect of monetary policy on house price inflation in the nine census divisions of the US economy using a FAVAR model.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 37 (2010)
Issue (Month): 6 (September)
Pages: 616-626

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Handle: RePEc:eme:jespps:v:37:y:2010:i:6:p:616-626

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Related research

Keywords: Economic processes; Economic resources; Inflation; Monetary policy;

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Citations

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Cited by:
  1. Rangan Gupta & Marius Jurgilas & Alan Kabundi & Stephen M. Miller, 2009. "Monetary Policy and Housing Sector Dynamics in a Large-Scale Bayesian Vector Autoregressive Mode," Working Papers 0919, University of Nevada, Las Vegas , Department of Economics.
  2. Musso, Alberto & Neri, Stefano & Stracca, Livio, 2010. "Housing, consumption and monetary policy: how different are the US and the euro area?," Working Paper Series 1161, European Central Bank.
  3. Beatrice D. Simo - Kengne & Mehmet Balcilar & Rangan Gupta & Monique Reid & Goodness C. Aye, 2012. "Is the relationship between monetary policy and house prices asymmetric in South Africa? Evidence from a Markov-Switching Vector Autoregressive mode," Working Papers 14/2012, Stellenbosch University, Department of Economics.
  4. Wadud, I.K.M. Mokhtarul & Bashar, Omar H.M.N. & Ahmed, Huson Joher Ali, 2012. "Monetary policy and the housing market in Australia," Journal of Policy Modeling, Elsevier, vol. 34(6), pages 849-863.
  5. Rangan Gupta & Alain Kabundi & Mampho P. Modise, 2009. "Has the SARB Become More Effective Post Inflation Targeting?," Working Papers 200925, University of Pretoria, Department of Economics.
  6. Kazi, Irfan Akbar & Wagan, Hakimzadi & Akbar, Farhan, 2013. "The changing international transmission of U.S. monetary policy shocks: Is there evidence of contagion effect on OECD countries," Economic Modelling, Elsevier, vol. 30(C), pages 90-116.
  7. Christophe Andre & Rangan Gupta & Patrick T. Kanda, 2012. "Do House Prices Impact Consumption and Interest Rate? Evidence from OECD Countries using an Agnostic Identification Procedure," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 58(1), pages 19-70.
  8. Rangan Gupta, 2012. "Forecasting House Prices for the Four Census Regions and the Aggregate US Economy: The Role of a Data-Rich Environment," Working Papers 201214, University of Pretoria, Department of Economics.
  9. Maria Christidou & Panagiotis Konstantinou, 2011. "Housing Market and the Transmission of Monetary Policy: Evidence from U.S. States," Discussion Paper Series 2011_14, Department of Economics, University of Macedonia, revised Sep 2011.
  10. Simo-Kengne, Beatrice D. & Balcilar, Mehmet & Gupta, Rangan & Reid, Monique & Aye, Goodness C., 2013. "Is the relationship between monetary policy and house prices asymmetric across bull and bear markets in South Africa? Evidence from a Markov-switching vector autoregressive model," Economic Modelling, Elsevier, vol. 32(C), pages 161-171.

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