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House Prices and Inflation: A Cointegration Analysis for Finland and Sweden

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Author Info

  • Barot, Bharat
  • Takala, Kari

    ()
    (Bank of Finland)

Abstract

Given the emphasis on price stability in monetary policy, the concern caused by recent rapid increases in housing prices are understandable. It is suspected that such rises may provide early indication of mounting inflationary pressure. The purpose of this paper is to formulate and estimate an error-correction system model for housing prices and inflation for forecasting purposes. By using the estimated cointegrating vector, we also get an estimate of the equilibrium level for house prices that might be helpful in analysing the current situation in the housing market and the stance for monetary policy. Housing prices typically exhibit large cycles, and they are thus predictable to some extent. Volatility is caused by the fact that the supply of houses does not react perfectly to changes in housing demand. However, housing prices and inflation tend to have similar growth rates over the long run. In other words, houses provide a good inflation shelter, but in the long run, the real return to is equal to the explicit or implicit rental income derived from the owning of houses. The estimation results also show that the changes in the general price level are transmitted into house prices rather quickly, but inflation is surprisingly insensitive to housing prices. The equilibrium relationship between housing prices and consumer prices is also affected in the short run by variables such as interest rates, wage rates and the unemployment rate.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/DP_12_1998.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 12/1998.

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Length: 43 pages
Date of creation: 18 Jun 1998
Date of revision:
Handle: RePEc:hhs:bofrdp:1998_012

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: house prices; inflation; cointegration;

References

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  1. Brown, Jane P. & Song, Haiyan & McGillivray, Alan, 1997. "Forecasting UK house prices: A time varying coefficient approach," Economic Modelling, Elsevier, vol. 14(4), pages 529-548, October.
  2. F J Breedon & M A S Joyce, 1993. "House prices, arrears and possessions: A three equation model for the UK," Bank of England working papers 14, Bank of England.
  3. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
  4. Buckley, Robert & Ermisch, John, 1982. "Government Policy and House Prices in the United Kingdom: An Econometric Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 44(4), pages 273-304, November.
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Citations

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Cited by:
  1. Mika Kuismanen & Seppo Laakso & Heikki A. Loikkanen, 1999. "Demographic Factors and the Demand for Housing in the Helsinki Metropolitan Area," Discussion Papers 191, Government Institute for Economic Research Finland (VATT).
  2. Elias Oikarinen, 2010. "Foreign Ownership of Stocks and Long-run Interdependence Between National Housing and Stock Markets—Evidence from Finnish Data," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 486-509, November.
  3. Bharat Barot & Zan Yang, 2004. "House Prices and Housing Investment in Sweden and the UK. Econometric analysis for the period 1970-1998," Macroeconomics 0409022, EconWPA.
  4. W. Miles, 2008. "Boom–Bust Cycles and the Forecasting Performance of Linear and Non-Linear Models of House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 249-264, April.
  5. Irene de Greef & Ralph de Haas, 2002. "Housing Prices, Bank Lending, and Monetary Policy," Macroeconomics 0209010, EconWPA.
  6. Oikarinen, Elias, 2006. "Price Linkages between Stock, Bond and Housing Markets - Evidence from Finnish Data," Discussion Papers 1004, The Research Institute of the Finnish Economy.
  7. Bharat Barot, 2004. "Growth and Business Cycles for the Swedish Economy 1963-1999," Macroeconomics 0409017, EconWPA.
  8. Bharat Barot, 2001. "An Econometric Demand�Supply Model For Swedish Private Housing," European Journal of Housing Policy, Taylor and Francis Journals, vol. 1(3), pages 417-444, December.
  9. Barot, Bharat & Yang, Zan, 2002. "House Prices and Housing Investment in Sweden and the United Kingdom: Econometric Analysis for the Period 1970-1998," Working Paper 80, National Institute of Economic Research.

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