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Monetary Policy and the Housing Market: A Structural Factor Analysis

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  • Matteo LUCIANI

Abstract

This paper estimates a Structural Dynamic Factor Model on a panel of 102 US quarterly series. We model economic comovements by means of five underlying structural shocks (oil price, productivity, aggregate demand, monetary policy, and housing demand). The results of the benchmark model (impulse responses and variance decomposition) are in line with those predicted by economic theory and estimated in the empirical literature. We show that after the reforms to the housing finance sector starting in the early 1980s, housing demand shocks account for a slightly higher portion of model variability, while the role of monetary policy in determining residential investment fluctuations is slightly decreased. The model analyzes the sources of the fluctuations in the first decade of the 2000: we find that monetary policy shocks contributed to both the boom and bust in housing.

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Bibliographic Info

Paper provided by Department of the Treasury, Ministry of the Economy and of Finance in its series Working Papers with number wp2010-7.

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Length: 39
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Handle: RePEc:itt:wpaper:wp2010-7

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Keywords: Structural Factor Model; Business Cycle; Monetary Policy; Housing;

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References

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  1. Francesco Lippi & Andrea Nobili, 2009. "Oil and the macroeconomy: a quantitative structural analysis," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 704, Bank of Italy, Economic Research and International Relations Area.
  2. Mario Forni & Domenico Giannone & Marco Lippi & Lucrezia Reichlin, 2008. "Opening the Black Box: Structural Factor Models with Large Cross-Sections," Working Papers ECARES, ULB -- Universite Libre de Bruxelles 2008_036, ULB -- Universite Libre de Bruxelles.
  3. Jörg Breitung & Sandra Eickmeier, 2006. "Dynamic factor models," AStA Advances in Statistical Analysis, Springer, Springer, vol. 90(1), pages 27-42, March.
  4. Altissimo, Filippo & Cristadoro, Riccardo & Forni, Mario & Lippi, Marco & Veronese, Giovanni, 2006. "New EuroCOIN: Tracking Economic Growth in Real Time," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5633, C.E.P.R. Discussion Papers.
  5. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  6. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2004. "The generalised dynamic factor model: consistency and rates," ULB Institutional Repository 2013/10133, ULB -- Universite Libre de Bruxelles.
  7. Forni, Mario & Gambetti, Luca, 2008. "The Dynamic Effects of Monetary Policy: A Structural Factor Model Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7098, C.E.P.R. Discussion Papers.
  8. Galí, Jordi & Gambetti, Luca, 2008. "On the Sources of the Great Moderation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6632, C.E.P.R. Discussion Papers.
  9. Alessandro Calza & Tommaso Monacelli & Livio Stracca, 2013. "Housing Finance And Monetary Policy," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 11, pages 101-122, 01.
  10. Forni M. & Hallin M., 2003. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Computing in Economics and Finance 2003 143, Society for Computational Economics.
  11. Vargas-Silva, Carlos, 2008. "Monetary policy and the US housing market: A VAR analysis imposing sign restrictions," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(3), pages 977-990, September.
  12. Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 15(3), pages 345-53, July.
  13. Amengual, Dante & Watson, Mark W., 2007. "Consistent Estimation of the Number of Dynamic Factors in a Large N and T Panel," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 91-96, January.
  14. Vladimir Klyuev & Paul Mills, 2007. "Is Housing Wealth an “ATM”? The Relationship Between Household Wealth, Home Equity Withdrawal, and Saving Rates," IMF Staff Papers, Palgrave Macmillan, vol. 54(3), pages 539-561, July.
  15. Hallin, Marc & Liska, Roman, 2007. "Determining the Number of Factors in the General Dynamic Factor Model," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 102, pages 603-617, June.
  16. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers : evidence from an estimated DSGE model," Working Paper Research, National Bank of Belgium 145, National Bank of Belgium.
  17. Forni, Mario & Lippi, Marco & Reichlin, Lucrezia, 2003. "Opening the Black Box: Structural Factor Models versus Structural VARs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4133, C.E.P.R. Discussion Papers.
  18. Alessi, Lucia & Barigozzi, Matteo & Capasso, Marco, 2008. "A robust criterion for determining the number of static factors in approximate factor models," Working Paper Series, European Central Bank 0903, European Central Bank.
  19. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(06), pages 1113-1141, December.
  20. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2002. "Do Financial Variables Help Forecasting Inflation and Real Activity in the Euro Area?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3146, C.E.P.R. Discussion Papers.
  21. Carlos Vargas-Silva, 2008. "The effect of monetary policy on housing: a factor-augmented vector autoregression (FAVAR) approach," Applied Economics Letters, Taylor & Francis Journals, vol. 15(10), pages 749-752.
  22. Giannone, Domenico & Reichlin, Lucrezia & Sala, Luca, 2002. "Tracking Greenspan: Systematic and Unsystematic Monetary Policy Revisited," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3550, C.E.P.R. Discussion Papers.
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Cited by:
  1. Matteo Barigozzi & Antonio M. Conti & Matteo Luciani, 2013. "Do euro area countries respond asymmetrically to the common monetary policy?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 923, Bank of Italy, Economic Research and International Relations Area.
  2. Matteo Luciani & Antoniomaria Conti & Matteo Barigozzi, 2013. "Do Euro Area Countries Respond Asymmetrically to the Common Monetary Policy?," ULB Institutional Repository 2013/153330, ULB -- Universite Libre de Bruxelles.

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