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Housing and monetary policy

  • John B. Taylor

Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.

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File URL: http://www.kansascityfed.org/PUBLICAT/SYMPOS/2007/PDF/Taylor_0415.pdf
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Article provided by Federal Reserve Bank of Kansas City in its journal Proceedings - Economic Policy Symposium - Jackson Hole.

Volume (Year): (2007)
Issue (Month): ()
Pages: 463-476

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Handle: RePEc:fip:fedkpr:y:2007:p:463-476
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  1. William Poole, 2007. "Understanding the Fed," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-14.
  2. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August.
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