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The role of house prices in the monetary policy transmission mechanism in small open economies

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  • Bjørnland, Hilde C.
  • Jacobsen, Dag Henning

Abstract

We analyse the role of house prices in the monetary policy transmission mechanism in Norway, Sweden and the UK, using structural VARs. A solution is proposed to the endogeneity problem of identifying shocks to interest rates and house prices by using a combination of short-run and long-run (neutrality) restrictions. By allowing the interest rate and house prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, house prices react immediately and strongly to a monetary policy shock. Furthermore, the fall in house prices enhances the negative response in output and consumer price inflation that has traditionally been found in the conventional literature. Moreover, we find that the interest rate responds systematically to a change in house prices. However, the strength and timing of response varies between the countries, suggesting that housing may play a different role in the monetary policy setting.

Suggested Citation

  • Bjørnland, Hilde C. & Jacobsen, Dag Henning, 2010. "The role of house prices in the monetary policy transmission mechanism in small open economies," Journal of Financial Stability, Elsevier, vol. 6(4), pages 218-229, December.
  • Handle: RePEc:eee:finsta:v:6:y:2010:i:4:p:218-229
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    Keywords

    Structural VAR Monetary policy House prices Identification;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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