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The Link between Output, Inflation, Monetary Policy and Housing Price Dynamics

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  • Demary, Markus
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    Abstract

    This study analyses empirically the link between real house prices and key macro variables like prices, output and interest rates for ten OECD countries. We find out that a monetary policy shock lowers real house prices in all ten countries, where the interest rate shock explains between 12 and 24 percent of the fluctuations in house prices. Impulse responses indicate that house prices rise after an output shock in nine of ten countries. But we also find evidence that real estate prices have a large impact on these key macroeconomic variables. We find out that the house price shock is a germane aggregate demand shock because it raises output and prices and leads to increasing money market rates in all countries. The story behind this finding is that increasing house prices lead to an increase in households' net worth which leads to increasing consumption expentitures and thereby stimulates aggregate demand. This stimulus on aggregate demand leads to increasing output and inflationary pressures on which the central bank reacts by tightening monetary policy. We find out that 12 to 20 percent of output fluctuations and around 10 to 20 percent of price fluctuations can be traced back to the housing demand shock. Moreover, we find that these housing demand shocks are a key driver of money market rates. We conclude that this channel is empirically relevant.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15978.

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    Date of creation: 08 May 2009
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    Handle: RePEc:pra:mprapa:15978

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    Keywords: Inflation; Monetary Policy; Housing Prices; Vectorautoregressions;

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    18. 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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    Cited by:
    1. Berlemann, Michael & Freese, Julia, 2010. "Monetary Policy and Real Estate Prices: A Disaggregated Analysis for Switzerland," Working Paper 105/2010, Helmut Schmidt University, Hamburg.
    2. Christophe Andre & Rangan Gupta & Patrick T. Kanda, 2012. "Do House Prices Impact Consumption and Interest Rate? Evidence from OECD Countries using an Agnostic Identification Procedure," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, Duncker & Humblot, Berlin, vol. 58(1), pages 19-70.
    3. Beatrice D. Simo-Kengne & Manoel Bittencourt & Rangan Gupta, 2011. "House Prices and Economic Growth in South Africa: Evidence from Provincial-Level Data," Working Papers 201116, University of Pretoria, Department of Economics.
    4. Berlemann, Michael & Freese, Julia & Knoth, Sven, 2012. "Eyes Wide Shut? The U.S. House Market Bubble through the Lense of Statistical Process Control," Working Paper 124/2012, Helmut Schmidt University, Hamburg.

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