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The role of house prices in the monetary policy transmission mechanism in the U.S

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Abstract

We analyze the role of house prices in the monetary policy transmission mechanism in the U.S. using structural VARs. The VAR is identified using a combination of short-run and long-run (neutrality) restrictions, allowing for a contemporaneous interaction between monetary policy and various asset prices. By allowing the interest rate and asset prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, following a monetary policy shock that raises the interest rate by one percentage point, house prices fall immediately by 1 percent, for then to decline by a total of 4-5 percent after three years. Furthermore, the fall in house prices enhances the negative response in output and consumer price inflation that has traditionally been found in the conventional literature.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2008/WP-200824/
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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2008/24.

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Length: 24 pages
Date of creation: 12 Dec 2008
Date of revision:
Handle: RePEc:bno:worpap:2008_24

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Keywords: VAR; monetary policy; house prices; identification.;

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Cited by:
  1. Belke, Ansgar, 2010. "Die Auswirkungen der Geldmenge und des Kreditvolumens auf die Immobilienpreise: Ein ARDL-Ansatz für Deutschland," IBES Diskussionsbeiträge 183, University of Duisburg-Essen, Faculty for Economics and Business Administration.
  2. Eickmeier, Sandra & Hofmann, Boris, 2010. "Monetary policy, housing booms and financial (im)balances," Working Paper Series 1178, European Central Bank.
  3. Claudia M. Buch & Sandra Eickmeier & Esteban Prieto, 2010. "Macroeconomic Factors and Micro-Level Bank Risk," CESifo Working Paper Series 3194, CESifo Group Munich.
  4. Hilde C. Bjørnland & Dag Henning Jacobsen, 2009. "The role of house prices in the monetary policy transmission mechanism in small open economies," Working Paper 2009/06, Norges Bank.
  5. 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.

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