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Housing Market and the Transmission of Monetary Policy: Evidence from U.S. States

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    Abstract

    What are the effects of monetary policy on the housing market? Is the response of the housing market similar across different states? We explore the impact of monetary policy shocks on real house prices and housing investment, using US state-level data. To this end we estimate VAR models for the period 1988-2009, to assess the differential effect - if any - of a common monetary policy shock on house prices and investment. Our VAR models also allow us to explore the macroeconomic effect of wealth shocks that originate in the housing market (housing prices). Our empirical models include key macroeconomic variables, namely personal income, prices and the federal funds rate, as well as housing market variables, e.g. real house prices, given by the FHFA house price index, and housing investment, proxied by the number of housing starts. Our baseline estimates suggest that transmission of monetary policy is heterogeneous across US states. Moreover, our VAR models indicate the presence of a wealth effect across most US states, as a positive housing price innovation leads to a strong, negative response of personal income.

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    Bibliographic Info

    Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2011_14.

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    Date of creation: Sep 2011
    Date of revision: Sep 2011
    Handle: RePEc:mcd:mcddps:2011_14

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    Web page: http://www.uom.gr/index.php?tmima=3

    Related research

    Keywords: House prices; Monetary policy transmission; VAR; Wealth effect.;

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    1. Efthymios Pavlidis & I Paya & D Peel & A M Spiru, 2009. "Bubbles in House Prices and their Impact on Consumption: Evidence for the US," Working Papers 601552, Lancaster University Management School, Economics Department.
    2. Kai Carstensen & Oliver Hülsewig & Timo Wollmershäuser, 2009. "Monetary Policy Transmission and House Prices: European Cross-country Evidence," CESifo Working Paper Series 2750, CESifo Group Munich.
    3. Rangan Gupta & Alain Kabundi, 2009. "The Effect Of Monetary Policy On House Price Inflation: A Factor Augmented Vector Autoregression (Favar) Approach," Working Papers 200903, University of Pretoria, Department of Economics.
    4. Goodhart, Charles & Hofmann, Boris, 2008. "House Prices, Money, Credit and the Macroeconomy," Working Paper Series 0888, European Central Bank.
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    14. 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.
    15. 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.
    16. Aksoy, Yunus & De Grauwe, Paul & Dewachter, Hans, 2002. "Do asymmetries matter for European monetary policy?," European Economic Review, Elsevier, vol. 46(3), pages 443-469, March.
    17. Del Negro, Marco & Otrok, Christopher, 2007. "99 Luftballons: Monetary policy and the house price boom across U.S. states," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1962-1985, October.
    18. repec:diw:diwfin:diwfin07040 is not listed on IDEAS
    19. Todd H. Kuethe & Valerien Pede, 2009. "Regional Housing Price Cycles: A Spatio-Temporal Analysis Using Us State Level," Working Papers 09-04, Purdue University, College of Agriculture, Department of Agricultural Economics.
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