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Financial Liberalisation and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence

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Author Info

  • Matteo Iacoviello

    ()
    (Boston College)

  • Raoul Minetti

    ()
    (Michigan State University)

Abstract

We analyse the impact of financial liberalisation on the link between monetary policy and house prices. We present a simple model of a small open economy subject to credit constraints. The model shows that the higher the degree of financial liberalisation, the stronger is the impact of interest rate shocks on house prices. We then use vector autoregressions to study the role of monetary policy shocks in house price fluctuations in Finland, Sweden and UK, characterised by financial liberalisation episodes over the last twenty years. We find that the response of house prices to interest rate surprises is bigger and more persistent in periods characterised by more liberalised financial markets.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 538.

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Length: 42 pages
Date of creation: 01 Oct 2002
Date of revision:
Publication status: Forthcoming, The Manchester School
Handle: RePEc:boc:bocoec:538

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Web page: http://fmwww.bc.edu/EC/
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Keywords: House prices; monetary policy; financial liberalisation.;

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  1. Garry J. Schinasi & Alexander W. Hoffmaister, 1994. "Asset Prices, Financial Liberalization, and the Process of Inflation in Japan," IMF Working Papers 94/153, International Monetary Fund.
  2. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  3. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  4. Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, vol. 36(5), pages 1093-1127, June.
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