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Cross-Country Evidence On The Causal Relationship Between Policy Uncertainty And House Prices

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Author Info

  • Ghassen El Montasser

    ()
    (École Supérieure de Commerce de Tunis, Université de la Manouba)

  • Ahdi N. Ajmi

    ()
    (College of Science and Humanities in Slayel, Salman bin Abdulaziz University, Kingdom of Saudi Arabia)

  • Tsangyao Chang

    ()
    (Department of Finance, Feng Chia University, Taichung, Taiwan)

  • Beatrice D. Simo-Kengne

    ()
    (Department of Economics, University of Pretoria)

  • Christophe Andre

    ()
    (Economics Department, Organisation for Economic Co-operation and Development (OECD))

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper empirically examines the causal linkages between policy uncertainty and house prices in a panel of seven advanced countries including Canada, France, Germany, Italy, Spain, the UK and the US. We implement a bootstrap panel causality test on quarterly data from 2001Q1 to 2013Q1, which allows us to circumvent the data limitation as observations are pooled across countries. Empirical results provide evidence of a bi-directional causality between real house prices and policy uncertainty, suggesting that high uncertainty related to future economic fundamentals and policies increases house price volatility, which in turn may amplify financial and business cycles. This finding is consistent with individual results for France and Spain, while contrasting with the unidirectional causality reported in the remaining countries. Particularly, support for a unidirectional causality running from policy uncertainty to real house prices is found in Canada, Germany and Italy, while a unidirectional causality running from real house prices to policy uncertainty prevails in the UK and the US.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201380.

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Length: 14 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:pre:wpaper:201380

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Keywords: House prices; Uncertainty; Cross-section Dependence and Heterogeneity; Panel Causality Test;

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References

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  1. Hideaki Hirata & M. Ayhan Kose & Chris Otrok & Marco TerronesÂ, . "Global House Price Fluctuations: Synchronization and Determinants," Working Paper 164451, Harvard University OpenScholar.
  2. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
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  5. Dani Rodrik, 1989. "Policy Uncertainty and Private Investment in Developing Countries," NBER Working Papers 2999, National Bureau of Economic Research, Inc.
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  7. Bernanke, Ben S, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(1), pages 85-106, February.
  8. Emirmahmutoglu, Furkan & Kose, Nezir, 2011. "Testing for Granger causality in heterogeneous mixed panels," Economic Modelling, Elsevier, Elsevier, vol. 28(3), pages 870-876, May.
  9. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 239-53, January.
  10. Granger, Clive W. J., 2003. "Some aspects of causal relationships," Journal of Econometrics, Elsevier, Elsevier, vol. 112(1), pages 69-71, January.
  11. John Muellbauer & Anthony Murphy, 2008. "Housing markets and the economy: the assessment," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 24(1), pages 1-33, spring.
  12. Pesaran, M.H. & Ullah, A. & Yamagata. T., 2006. "A Bias-Adjusted LM Test of Error Cross Section Independence," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0641, Faculty of Economics, University of Cambridge.
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