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Financial Market Liberalization, Monetary Policy, and Housing Price Dynamics

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Author Info

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Marius Jurgilas

    ()
    (Norges Bank, Oslo, Norway)

  • Stephen M. Miller

    ()
    (College of Business, University of Las Vegas, Nevada)

  • Dylan van Wyk

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper considers how monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector and whether the financial market liberalization of the early 1980’s influenced those dynamics. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model over the periods 1968:01 to 1982:12 and 1989:01 to 2003:12, including 21 housing-sector variables at the national and four census regions. Overall, the 100 basis point Federal funds rate shock produces larger effects on the real house prices, both at the regional level and the national level, in the post-liberalization period when compared to the pre-liberalization era. While the precision of the estimates do not imply significant differences, the finding does offer a caution. That is, the housing market appears more sensitive to monetary policy shocks in the post-liberalization period. On the one hand, this suggests that monetary policy possesses increased leverage. On the other hand, the housing market cycle traditionally contributes an important component to the aggregate business cycle. Thus, the monetary authorities may need to exercise more care in implementing Federal funds rate adjustments going forward. In addition, contractionary monetary policy exerts a negative effect on house prices at the national level, indicating the absence of the price puzzle in small structural vector autoregressive models. The puzzle’s absence in the housing sector possibly emerges as a result of proper identification of monetary policy shocks within a data-rich environment. Finally, we find that the reaction of housing sector proves heterogeneous across regions, with the housing sector in the South driving the national data after liberalization, while before liberalization, the Middle West appears to drive the housing market. The responses in the West differ the most from the other regions.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201009.

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Length: 27 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:pre:wpaper:201009

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Keywords: Monetary policy; Housing sector dynamics; Large-Scale BVAR models;

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Citations

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Cited by:
  1. Beatrice D. Simo-Kengne & Stephen M. Miller & Rangan Gupta, 2013. "Evolution of Monetary Policy in the US: The Role of Asset Prices," Working Papers, University of Pretoria, Department of Economics 201343, University of Pretoria, Department of Economics.
  2. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel Abidin Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working Papers, University of Nevada, Las Vegas , Department of Economics 1211, University of Nevada, Las Vegas , Department of Economics.
  3. Beatrice D. Simo - Kengne & Mehmet Balcilar & Rangan Gupta & Monique Reid & Goodness C. Aye, 2012. "Is the relationship between monetary policy and house prices asymmetric in South Africa? Evidence from a Markov-Switching Vector Autoregressive mode," Working Papers 14/2012, Stellenbosch University, Department of Economics.
  4. Rangan Gupta, 2012. "Forecasting House Prices for the Four Census Regions and the Aggregate US Economy: The Role of a Data-Rich Environment," Working Papers, University of Pretoria, Department of Economics 201214, University of Pretoria, Department of Economics.
  5. Vittorio Peretti & Rangan Gupta & Roula Inglesi-Lotz, 2012. "Do House Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers, University of Pretoria, Department of Economics 201216, University of Pretoria, Department of Economics.

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