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House prices and interest rates: Bayesian evidence from Germany

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  • Christoph Hanck
  • Jan Prüser

Abstract

This study uses a Bayesian VAR (BVAR) to demonstrate that the recent boom in German house prices can be explained by falling interest rates and that higher interest rates are likely sufficient to stop the price increase. The latter suggests a potential drawback of the current monetary policy of the ECB. The BVAR’s prior information shrinks the model parameters towards a parsimonious benchmark in order to avoid overfitting the data. We use an empirical Bayes approach to select the informativeness of the prior. To choose relevant control variables, we use a Bayesian variable selection approach. In addition to impulse responses and variance decompositions, we use a Bayesian conditional forecast to test the hypothetical effect of an interest rate increase on house prices.

Suggested Citation

  • Christoph Hanck & Jan Prüser, 2020. "House prices and interest rates: Bayesian evidence from Germany," Applied Economics, Taylor & Francis Journals, vol. 52(28), pages 3073-3089, June.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:28:p:3073-3089
    DOI: 10.1080/00036846.2019.1705242
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    Cited by:

    1. Michael Berlemann & Marina Eurich & Erik Haustein, 2022. "Inflation in Deutschland gewinnt an Fahrt [Inflation in Germany gains momentum]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 102(4), pages 319-320, April.
    2. Roy, Ripon & Bashar, Omar H.N.M. & Bhattacharya, Prasad Sankar, 2023. "The cross-industry effects of monetary policy: New evidence from Bangladesh," Economic Modelling, Elsevier, vol. 127(C).

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