The Interrelation Between the Financial and Housing Markets: Implications for the Eurozone Stability

The recent financial instability and its transmission to the productive economy, as well as revealing the bidirectional nature of the relationship between financial and real variables, provides important questions about the ability of the European Central Bank to implement an effective monetary policy in an area as heterogeneous as the Eurozone. This finding is especially relevant when it comes to explaining the relationship between reference interest rates of monetary policy, the behavior of credit, the generation of price bubbles in the housing market and the evolution of real economic activity. Thereby, the main objective of this paper is to explore into the nature of the relationship between financial and real estate markets and the factors that determine the possibilities of the ECB to contribute to the stability of the Eurozone through the implementation of monetary policy. To do this we estimate a VAR model that allows to obtain evidence about the relationship between housing prices, interest rate, credit, inflation and GDP for a sample of five countries that form part of the Eurozone (Spain, Ireland, Austria, France and Portugal).