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Regional housing market spillovers in the US: lessons from regional divergences in a common monetary policy setting

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  • Vansteenkiste, Isabel

Abstract

In this paper, we seek to quantify the importance of state-level housing price spillovers and interest rate shocks to house price developments in the United States. The econometric approach involves an application of the recently developed global VAR (GVAR) as presented in Dées, DiMauro, Pesaran, and Smith (2005) and Pesaran, Schuermann, and Weiner (2004) to the 31 biggest US states over the period 1986-2005. Such an approach allows not only for the empirical derivation of the impact of common shocks (such as interest rate shocks) on US house price developments, but also for an analysis of the importance of interstate housing price spillovers. Beyond real house prices and real income per capita, each state-specific vector error correction model also includes nation-wide variables — measured as a weighted average of other states —. These individual state models are then linked in a consistent and cohesive manner. Impact elasticities indicate strong interregional linkages for both real house prices and real income per capita. An analysis of generalised impulse responses indicates that the importance of housing price spillovers is state dependent, with shocks occurring in states with relatively lower land supply elasticities having much stronger spillover effects that those in the other states. As regards real interest rates, the impact appears to be relatively small with an increase of 100 basis points in the real 10-year government bond yield resulting in a long run fall in house prices of between 0.5 and 2.5%. This would suggest, in line with DelNegro and Otrok (2005) that the decline in long-term interest rates is not the primary factor that has driven the recent surge in house prices in the United States. JEL Classification: C32, E44, R10, R31

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0708.

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Date of creation: Jan 2007
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Handle: RePEc:ecb:ecbwps:20070708

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Keywords: global VAR (GVAR); housing; monetary policy;

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References

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  1. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2001. "Modelling regional interdependencies using a global error-correcting macroeconometric model," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-1, International Conferences on Panel Data.
  2. Matteo Iacoviello & Raoul Minetti, 2002. "The Credit Channel of Monetary Policy: Evidence from the Housing Market," Boston College Working Papers in Economics 541, Boston College Department of Economics, revised 29 Aug 2003.
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  11. Dées, Stéphane & di Mauro, Filippo & Pesaran, Hashem & Smith, Vanessa, 2005. "Exploring the international linkages of the euro area: a global VAR analysis," Working Paper Series 0568, European Central Bank.
  12. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack & Christopher J. Mayer, 2002. "Determinants of Real House Price Dynamics," NBER Working Papers 9262, National Bureau of Economic Research, Inc.
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  14. Meen, Geoffrey, 2002. "The Time-Series Behavior of House Prices: A Transatlantic Divide?," Journal of Housing Economics, Elsevier, vol. 11(1), pages 1-23, March.
  15. Marco Del Negro & Christopher Otrok, 2005. "Monetary policy and the house price boom across U.S. states," Working Paper 2005-24, Federal Reserve Bank of Atlanta.
  16. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  17. Chirinko, Robert S. & Haan, Leo de & Sterken, Elmer, 2004. "Asset Price Shocks, Real Expenditures, and Financial Structure:A Multi-Country Analysis," CCSO Working Papers 200411, University of Groningen, CCSO Centre for Economic Research.
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  20. Fratantoni, Michael & Schuh, Scott, 2003. " Monetary Policy, Housing, and Heterogeneous Regional Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 557-89, August.
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Citations

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Cited by:
  1. Dreger, Christian & Zhang, Yanqun, 2014. "Does the economic integration of China affect growth and inflation in industrial countries?," Economic Modelling, Elsevier, vol. 38(C), pages 184-189.
  2. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok & Marco E Terrones, 2013. "Global House Price Fluctuations: Synchronization and Determinants," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 119 - 166.
  3. Yan Sun & Frigyes F Heinz & Giang Ho, 2013. "Cross-Country Linkages in Europe," IMF Working Papers 13/194, International Monetary Fund.
  4. Vansteenkiste, Isabel & Hiebert, Paul, 2011. "Do house price developments spillover across euro area countries? Evidence from a global VAR," Journal of Housing Economics, Elsevier, vol. 20(4), pages 299-314.
  5. Cesa-Bianchi, Ambrogio, 2013. "Housing cycles and macroeconomic fluctuations: A global perspective," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 215-238.
  6. TengTeng Xu, 2012. "The Role of Credit in International Business Cycles," Working Papers 12-36, Bank of Canada.
  7. Adam Traczyk, 2013. "Financial integration and the term structure of interest rates," Empirical Economics, Springer, vol. 45(3), pages 1267-1305, December.
  8. Christophe Andre & Luis A. Gil-Alana & Rangan Gupta, 2013. "Comovement in Euro Area Housing Prices: A Fractional Cointegration Approach," Working Papers 201359, University of Pretoria, Department of Economics.
  9. Hiebert, Paul & Vansteenkiste, Isabel, 2009. "Do house price developments spill over across euro area countries? Evidence from a Global VAR," Working Paper Series 1026, European Central Bank.
  10. Christophe André, 2010. "A Bird's Eye View of OECD Housing Markets," OECD Economics Department Working Papers 746, OECD Publishing.
  11. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok & Marco Terrones, 2013. "Global House Price Fluctuations," IMF Working Papers 13/38, International Monetary Fund.
  12. Favero, Carlo A., 2013. "Modelling and forecasting government bond spreads in the euro area: A GVAR model," Journal of Econometrics, Elsevier, vol. 177(2), pages 343-356.

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