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Housing and the Monetary Transmission Mechanism

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Frederic S. Mishkin

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Abstract

The housing market is of central concern to monetary policy makers. To achieve the dual goals of price stability and maximum sustainable employment, monetary policy makers must understand the role that housing plays in the monetary transmission mechanism if they are to set policy instruments appropriately. In this paper, I examine what we know about the role of housing in the monetary transmission mechanism and then explore the implications of this knowledge for the conduct of monetary policy. I begin with a theoretical and empirical review of the main housing-related channels of the transmission mechanism. These channels include the ways interest rates directly influence the user cost of housing capital, expectations of future house-price movements, and housing supply; and indirectly influence the real economy through standard wealth effects from house prices, balance sheet, credit-channel effects on consumer spending, and balance sheet, credit-channel effects on housing demand. I then consider the interaction of financial stability with the monetary transmission mechanism, and discuss the ways in which the housing sector might be a source of financial instability, and whether such instability could affect the ability of a central bank to stabilize the overall macroeconomy. I conclude with a discussion of two key policy issues. First, how can monetary policy makers deal with the uncertainty with regard to housing-related monetary transmission mechanisms? And second, how can monetary policy best respond to fluctuations in asset prices, especially house prices, and to possible asset-price bubbles?

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13518.

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Date of creation: Oct 2007
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Handle: RePEc:nbr:nberwo:13518

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Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
R21 - Urban, Rural, and Regional Economics - - Household Analysis - - - Housing Demand

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hugo Benítez-Silva & Selcuk Eren & Frank Heiland & Sergi Jiménez-Martín, 2008. "How Well do Individuals Predict the Selling Prices of their Homes?," Economics Working Papers 1065, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008. [Downloadable!]
    Other versions:
  2. Charles Calomiris & Stanley D. Longhofer & William Miles, 2009. "The (Mythical?) Housing Wealth Effect," NBER Working Papers 15075, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Rudiger von Armin, 2008. "Recession and rebalancing – An analysis of the credit crunch and global imbalances using a simple global model of the real side," SCEPA Working Papers 2008-4, Schwartz Center for Economic Policy Analysis (SCEPA), The New School. [Downloadable!]
  4. Belke, Ansgar & Orth, Walter & Setzer, Ralph, 2008. "Liquidity and the dynamic pattern of price adjustment: a global view," Discussion Paper Series 1: Economic Studies 2008,25, Deutsche Bundesbank, Research Centre. [Downloadable!]
  5. Elias Oikarinen, 2008. "Interaction between housing prices and household borrowing - the Finnish case," Discussion Papers 29, Aboa Centre for Economics. [Downloadable!]
  6. Elias Oikarinen, 2008. "Interaction between Housing Prices and Household Borrowing in Finland," Discussion Papers 1145, The Research Institute of the Finnish Economy. [Downloadable!]
  7. Ansgar Belke & Walter Orth, 2007. "Global Excess Liquidity and House Prices - A VAR Analysis for OECD Countries," Ruhr Economic Papers 0037, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
  8. Marek Jarocinski & Frank Smets, 2008. "House prices and the stance of monetary policy," Working Paper Series 891, European Central Bank. [Downloadable!]
    Other versions:
  9. Fernando Alexandre & Pedro Bação & Vasco Gabriel, 2008. "Taylor-type rules versus optimal policy in a Markov-switching economy¤," Department of Economics Discussion Papers 0608, Department of Economics, University of Surrey. [Downloadable!]
    Other versions:
  10. Michael Haliassos & Pany Karamanou & Constantinos Ktoris & George Syrichas, 2008. "Mortgage Debt, Social Customs,and Financial Innovation," Working Papers 2008-2, Central Bank of Cyprus, revised Apr 2008. [Downloadable!]
  11. Ansgar Belke & Walter Orth & Ralph Setzer, 2008. "Sowing the seeds for the subprime crisis: does global liquidity matter for housing and other asset prices?," International Economics and Economic Policy, Springer, vol. 5(4), pages 403-424, December. [Downloadable!] (restricted)
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    Other versions:
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